August 22, 2024
There are two types of mortgage insurance: private mortgage insurance (PMI) and Federal Housing Administration (FHA) mortgage insurance. Each has a specific use and purpose and its own price tag, which may vary depending on circumstances. We examine some important facts about each type below.
What To Know About Mortgage Insurance
- New borrowers should know that they cannot use FHA mortgage insurance on a conventional mortgage or vice versa.
- Borrowers applying for a conventional residential home loan must obtain private mortgage insurance or PMI.
- Those applying for an FHA loan will have FHA mortgage insurance.
- Although both serve the same purpose, prospective homebuyers need to understand key differences in eligibility requirements, cost structures, and cancellation policies.
Private Mortgage Insurance (PMI)
PMI protects lenders if a borrower defaults on a loan with less than a 20% down payment. Lenders consider this insurance necessary for loans that are viewed as higher risk. PMI typically has stricter eligibility criteria than FHA mortgage insurance.
Borrowers often need good credit scores (680 or higher) and a debt-to-income ratio of 43%. The cost varies depending on the borrower’s credit score, down payment amount, loan term, and the insurance provider. It is usually paid as a monthly premium added to the borrower’s mortgage payment.
Additionally, borrowers may be able to choose single-premium options or lender-paid mortgage insurance, where the lender deals with the insurance premium by charging a slightly higher interest rate.
Borrowers can cancel PMI once they reach 20% equity in the home, or even sooner if they have made higher-than-minimum mortgage payments.
FHA Mortgage Insurance
The Federal Housing Administration guarantees FHA mortgages and allow borrowers with lower credit scores and smaller down payments to apply for a home loan.
Borrowers with FHA loans pay the insurance premiums directly to the federal government. FHA loans have more lenient eligibility requirements than conventional loans:
- Borrowers can qualify with credit scores as low as 500, with a 10% down payment.
- Applicants with FICO scores of 580 or higher may qualify for a 3.5% down payment.
The cost structure includes an upfront mortgage insurance premium (UFMIP) and an annual MIP, which may be paid in installments as a monthly fee as part of the mortgage payment.
Depending on the down payment and other variables, borrowers may need to pay FHA mortgage insurance for either 11 years or the lifetime of the mortgage.
When choosing a home loan, consider the cost of mortgage insurance as part of the overall financial impact of the mortgage. When deciding on the right mortgage, compare quotes from different lenders, including the amount you’ll pay for mortgage insurance.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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