Borrower Paid Mortgage Insurance

Mortgage insurance is insurance issued by a private insurance company that protects the mortgage lender against some or all of the loss caused by a default by the borrower on payments of their mortgage loan. Mortgage insurance is generally required by lenders for borrowers who make a down payment of less than 20% of the home purchase price. The premiums for private mortgage insurance are paid by the borrower.

Mortgage insurance protects the mortgage lender and not the borrower. A borrower needs to remember that if they fall behind in their mortgage payments, their credit score may go down and they might lose their home through foreclosure. Mortgage insurance does not change these facts.

Generally, borrowers making a down payment of less than 20 percent of the purchase price of the home are required by their mortgage lender to have mortgage insurance. Generally, Federal Housing Authority (FHA) and United States Department of Agriculture (USDA) loans require mortgage insurance. Mortgage insurance reduces the risk to the lender of making a loan, so a borrower can qualify for a loan that they might not otherwise be able to get.

If a person gets a conventional loan, your lender may arrange for mortgage insurance with a private company. The premium rates for private mortgage insurance (PMI) vary according to the amount of the down payment and the borrower’s credit score. It is generally cheaper than FHA rates for borrowers with good credit and a higher down payment. Most private mortgage insurance is paid monthly, with little or no initial payment required at closing.

If a person gets a Federal Housing Administration (FHA) loan, the premiums for mortgage insurance are paid to the FHA. Federal Housing Administration mortgage insurance is required for all FHA loans. A person’s credit score does not affect the price of mortgage insurance for an FHA loan.

The price of mortgage insurance for an FHA loan is slightly higher if the down payment is less than five percent of the total purchase price. There are two payments involved in obtaining FHA mortgage insurance, i.e., an upfront cost, paid as part of the home purchase closing costs, and a monthly cost that is included in the monthly mortgage payment. If a person does not have the money to pay the upfront fee, it can be rolled into the monthly mortgage payment. If a person does this, the loan amount and the overall cost of the loan increases.

If a person gets a loan from the U.S. Department of Agriculture (USDA) loan, the program is similar to the FHA program, but typically cheaper. A person pays for the insurance both at closing and as part of their monthly mortgage payment. As with FHA loans, a person can roll the upfront portion into their mortgage instead of paying it out-of-pocket, but this increases both the loan amount and overall costs.

If a person gets a loan that is backed by the Department of Veterans’ Affairs (VA), the VA guarantee replaces mortgage insurance, and functions in a similar manner. With VA-backed loans, there is no monthly mortgage insurance premium payment. However, the borrower pays an upfront “funding fee.” The amount of that fee varies depending on the following factors:

• The type of military service the veteran experienced;
• The amount of the down payment;
• The veteran’s disability status, if any;
• Whether the veteran is buying a home or refinancing an existing loan;
• Whether this is the veteran’s first VA loan, or if they have had a VA loan before.

As with FHA and USDA loans, a person can roll the upfront fee into their mortgage instead of paying it out of pocket, but doing so increases both the loan amount and overall costs.

Again, the borrower must pay for mortgage insurance, even though it protects the lender. So, it increases the cost of the loan to the borrower. If a person is required to pay for mortgage insurance, it is usually included in the total monthly payment that the borrower makes to their lender. So, at least it is not a separate payment that a borrower has to make every month.

Benefits of Borrower-Paid Mortgage Insurance

Borrower-paid mortgage insurance allows lenders to reduce the risk that is present in making a loan that the lender considers to be a higher risk loan. Borrower-paid mortgage insurance also enables borrowers who do not have a large down payment, now generally required to be 20% of the purchase price, to have access to home ownership.

A buyer who has borrower paid mortgage insurance may be able to purchase a home with as little as a 3% down payment.

Cancellation or Termination of Borrower-Paid Mortgage Insurance

If a person’s mortgage was signed prior to July 29, 1999, they must ask to have the borrower- paid mortgage insurance terminated once the equity in their home exceeds 20%, based on the original purchase price. The requirement to have mortgage insurance should be removed, provided the person’s mortgage loan payments are not in arrears. In other words, a person should not rely on the mortgage lender to terminate the insurance coverage when the condition is met. The borrower needs to request it.

If a person’s mortgage was signed on or after July 29, 1999, the Homeowners Protection Act of 1998 adds special protections for the borrower. Generally, if a person is current on their mortgage payments, the borrower-paid mortgage insurance must be terminated automatically when the borrower achieves equity of 22% in the home based on the original purchase price.

If the borrower requests it, the mortgage insurance for a loan can also be terminated if the borrower has achieved equity of 20% in the home based on the original purchase price and the borrower is current on your mortgage payments.

The protections listed above do not apply:

• To government-insured FHA or VA loans or to loans with lender-paid mortgage insurance;
• To high risk borrowers;
• When the borrower is not current on the mortgage payments within the year prior to the proposed time of termination; or
• If there are other liens on the property.

Additional Protections of the Homeowners Protection Act of 1998

The Homeowners Protection Act of 1998 also requires the following:

If the mortgage was concluded on or after July 29, 1999, that borrowers are told at closing and once a year about borrower-paid mortgage insurance termination and cancellation;
If the mortgage was signed on or after July 29, 1999, that all borrowers be provided with a phone number by their lenders that they may call for information regarding termination and cancellation of borrower-paid mortgage insurance;
The lenders must tell all borrowers of the termination and cancellation rights they have under those loans, no matter the date on which the mortgage was signed.

Do I Need a Real Estate Attorney for My Borrower-Paid Mortgage Insurance Issue?

Many people continue to pay borrower-paid mortgage insurance even after acquiring enough equity in the home to terminate it, costing them hundreds of dollars each year. If your mortgage lender is not respecting your rights under the Homeowners’ Protection Act or the terms of your mortgage loan agreement, you should consult an experienced mortgage attorney.

Or, if you are confused about whether you still need mortgage insurance, a real estate attorney can help you determine whether you must continue to pay your borrower-paid mortgage insurance or whether terminating it is an option. You do not want to keep paying for insurance you do not need, so if you are not sure how to proceed, consult a knowledgeable real estate attorney for advice.