Understanding How Lenders Mortgage Insurance Works

When purchasing a home, if a person does not have at least 20% of the home's value to put as a down payment, they may be required by their lender to obtain a lenders mortgage insurance policy. Lenders mortgage insurance offers the lender protection in case the buyer would default on their loan. Loaning money to someone who does not have enough to invest in the property is considered a high risk by the lender, which is the main reason for lenders requiring this type of protection.

Why Lenders Mortgage Insurance is Necessary

Before 1965, lending institutions would not consider lending money for a property at more than 80% of its value. The reason for this was that banks felt they were at a risk of losing money if the borrower did not pay back the loan. These restrictions made it difficult for anyone to buy their first home. Lenders mortgage insurance allows a bank to supply a mortgage worth more than 80% of the property value because the insurance company is taking on the risk of the loan not being repaid, making it possible for individuals to buy a home without a 20% deposit.

Payment for Lenders Mortgage Insurance

Lenders mortgage insurance is not a fee that is necessary to pay every year; instead, it is a one-time premium that is paid for when the borrower receives the loan. Different mortgage companies will offer different ways for payment of this fee. Some companies will simply take the amount out of the loan amount. For example, if a consumer borrows $100,000 and the lenders mortgage insurance premium is $1000, the borrower will only receive $99,000. Another option is to have the amount of the premium added to the amount being borrowed. In the case above, the loan amount would be $101,000.

Calculating the Rate of Lenders Mortgage Insurance

Premiums for lenders mortgage insurance are calculated using a premium table, which simply means that the bank will charge a certain percent of the loan amount dependent upon the size of the loan and the percentage of the property value that is being borrowed. For example, a person that is borrowing $255,000 for a property that is valued at $300,000 is obtaining a loan at 85% of the property value. This is considered a rather small loan with a low percentage value, which means the premium amount will be low as well.

Loan Approval

When obtaining a mortgage for more than 80% of a property's value, the loan will not only have to be approved by the lender, but by the lenders mortgage insurance as well. Most lenders mortgage insurance companies are notorious for being conservative when approving loans, simply because they are the ones who will be taking all of the risk should the borrower not be able to pay back the loan. There are mortgage companies that will be able to approve a person for both the mortgage and lenders mortgage insurance as well.

Lenders mortgage insurance policies offer a way for people who may not have enough money to make a large down payment on a home, but otherwise are in good standing to buy a house. This type of insurance policy protects the mortgage company while providing a way for new buyers to afford a home.