Mortgage insurance is designed to protect the lender in the event of default. It also gives borrowers greater access to homeownership, as it negates the need for a large down payment. The most common types of mortgages, including Conventional and FHA, require insurance. Some government mortgages, including VA and USDA loans, are guaranteed by the government agencies that finance them and therefore do not require mortgage insurance.
The following common types of loans require insurance.
Conventional: Conventional loans require Private Mortgage Insurance (PMI), also known simply as Mortgage Insurance (MI), since the down payment is typically less than 20%. MI is included in the monthly payment. Another form of insurance available on conventional loans is Lender Paid Mortgage Insurance (LPMI). With LPMI, the lender pays for MI on behalf of the borrower, and in exchange, charges a higher interest rate for the life of the loan.
FHA (Federal Housing Administration): Borrowers who obtain a loan from the FHA, typically with a minimal down payment, are required to pay a Mortgage Insurance Premium (MIP) in order to secure the loan. The MIP is paid to the FHA at closing, and may be included in the loan. A monthly insurance payment is also included in the loan payment. The amount of the MIP and monthly premium vary with the term of the loan and the loan-to-value ratio.
The following types of loans are guaranteed rather than insured.
VA (U.S. Department of Veterans Affairs): With a guaranteed loan from the VA, the borrower pays the VA a "funding fee," which is set by the VA and varies from 0-3%. The fee is paid at the time of closing and may be included in the loan amount. There is no monthly insurance premium on VA loans.
USDA (U.S. Department of Agriculture): Under the Rural Development Program, the USDA offers guaranteed loans with 100% financing and no mortgage insurance requirement. At closing, a "funding fee" of 3.5% is paid to the USDA. This fee secures the guarantee on the loan, and may be rolled into the mortgage.
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