Lou Mallers is an Account Manager with Essent and has been working with us here at Compass for many years on finding our clients great options for Mortgage Insurance (MI).
We asked Lou to be our professional guest expert this week and answer some key questions about Mortgage Insurance that many people often have when applying for a loan.
Q: At what point should you apply for MI?
A: The best time for the borrower to inquire about MI is when they are talking with their Compass Mortgage LO about purchasing a home, and possibly looking for a potential pre-approval.
Q: What factors should people consider when looking at MI options?
A: MI insurance is available in many forms that can be designed to best meet the needs of the borrower. The options available are the borrower-paid monthly, where the MI payment is included in the borrower’s monthly mortgage payment, a single premium where the MI premium is paid up-front with no additional payment required from the borrower, a split premium program in which part of the MI is paid up-front and the remainder is paid in monthly installments that are less than the normal monthly payments, and lender-paid MI, in which the MI premium is typically included in the interest payment.
Q: How do I know how much coverage I will need?
A: The amount of MI coverage is set by investors such as Freddie Mac and Fannie Mae and is based on the LTV; the higher the LTV, the higher the coverage required by investors.
Q: Is MI mandatory?
A: Yes, MI is required for all loans sold to Fannie Mae and Freddie Mac where the borrower puts down less than 20% of the purchase price.
Q: What does MI protect me from?
A: MI is designed to protect the lender from a portion of the loss in the event the borrower defaults on the mortgage. This is needed when the lender is lending a high percentage of the loan to the borrower, i.e., >80.
Q: What is the biggest misunderstanding people have about MI?
A: Perhaps the biggest misunderstanding that people have about MI is that it will always be required for the life of the loan. MI can be cancelled under the following circumstances:
- The loan amount reaches 80% of the ORIGINAL value, and the borrower request cancelation, or
- The loan servicer, the one that the borrower makes their mortgage payment to, MUST cancel the MI once the loan amount reaches 78% of the ORIGINAL value, or
- The loan is paid off either by a sale or by refinancing.
*These are the requirements for conventional MI, loans that are underwritten to Freddie Mac and Fannie Mae guidelines; however, for loans insured by the FHA, the MI remains in effect for the life of the loan.
Looking for more information on homebuying? Our Mortgage 101 Handbook is the ultimate guide for first-time homebuyers.