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Writer's pictureDawid Jablonski

WHAT IS MORTGAGE INSURANCE AND WHY DO YOU HAVE TO PAY IT?

Mortgage insurance is a type of insurance policy that protects mortgage lenders or investors. Mortgage insurance lowers the risk involved in giving out loans. It qualifies you for a loan that you might not otherwise be able to get as it steps in and pays off all or part of the outstanding balance in the event that you default.


Brief History


Mortgage insurance started in the United States in the 1880s. The first law on this was passed in 1904 in New York. This industry grew in response to the real estate bubble that occurred in the 1920s. After the Great Depression, the housing industry witnessed a great decline, and by 1933, no mortgage insurance firm existed. No private mortgage insurance was permitted in the U.S. until 1956 when Wisconsin passed a law authorizing the first post-Depression insurer, Mortgage Guaranty Insurance Corporation, to be created.


In the 1950s, Max H. Karl, a Milwaukee real estate attorney, created the modern form of private mortgage insurance. Before then, Max Karl became frustrated with the paperwork and time needed to acquire a home backed by Federal Government Insurance. So, he took it upon himself to find a solution. In 1957, he founded the Mortgage Guaranty Insurance Corporation.


In 1961, California made a law requiring mortgage insurance on loans that later became the standard for other states' mortgage insurance laws.


When Is It Applied?


For most people, becoming a homeowner is an essential part of the American dream. Getting a mortgage is the best way to make this dream a reality. Mortgages are for a large amounts of money so, lenders take several measures (including mortgage insurance) to protect their loans. Mortgage insurance is an additional insurance policy you’ll be required to obtain so as to get a mortgage loan.


Who Is Insuring The Mortgage?


An insurance policy is part of the insurance transaction. Here, a master policy is issued to the bank or other mortgage-holding units. It outlines all the terms and conditions of each individual loan.


There are many companies offering mortgage insurance. Some of the major mortgage insurance companies include: National MI, MGIC, Radian, Essent, Genworth, and United Guaranty. Their rates might differ to some extent and your lender should chose the rate that is best for you.


How Can You Stop Paying Mortgage Insurance?

You can stop paying for mortgage insurance as soon as you have at least 20% equity in your house. Once you’ve paid down your mortgage balance down to 80% of the home’s estimated value, you can ask your lender to eliminate PMI. When you've reached a 78% loan-to-value ratio, your PMI policy should automatically cancel.



Can You Find A Lender That Does Not Require You To Pay Mortgage Insurance?


There are some loan programs that do not require mortgage insurance despite down payments as little as 3%. So, YES, you can!


For example, PNC Bank is a lender that has loan programs that do not require mortgage insurance. Here are 4 other loan lenders in the United State that have programs that do not require mortgage insurance:


Bank of America: This mortgage program is geared toward first time home buyers and to those with low-down-payments.


Flagstar: This lender examines each individual situation before determining borrower eligibility. If your score is 720 and above, then, you are qualified for a zero-down mortgage.


NACA: Their mission is to make homeownership accessible. They do not require the usual credit score or down payment amount before determining your eligibility.


CitiMortgage: If you have an excellent credit score, this institute will facilitate your loan application.


Your mortgage is one of the most important or most significant financial transactions you’ll ever make. And mortgage insurance allows lenders to fund loans to borrowers who might have less than stellar financial conditions or may not otherwise qualify.


Are you looking for a home? Do you need assistance getting prequalified? Contact me today! I can help!


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