In this episode of the Mortgage Brothers Podcast we will cover your most common questions about Mortgage Insurance.

What is mortgage insurance?

In short, mortgage insurance is insurance that relates to your mortgage payment. It protects the banks and because the banks are protected, they can offer you something in return. Mortgage insurance enables a lot of people to buy homes who wouldn’t be able to otherwise, as without it the minimum down of 20% isn’t affordable to everyone.

How does mortgage insurance work?

Now, if you have 20% or more down or 20% or more equity in your home, you don’t need mortgage insurance. The question then is, “why does the bank need insurance? Why is a 5% down payment just not good enough?”

Well, because what happens is, in the event a payment is not made or a borrower’s not able to make their payment, this insurance will help the lenders recover some of their losses. The insurance protects the loan that you were given in the event you were to stop making payments.

Mortgage Insurance with FHA, Conventional, and VA Loans

So, there are really three different loan products that we use: FHA, conventional, and VA. All three have their own version of mortgage insurance. So far what we’ve been talking about is conventional financing. With conventional financing, the minimum down payment for certain borrowers can be as low as 3% with mortgage insurance.

Now, FHA has a mortgage insurance premium. It’s important to remember that an FHA loan is government-insured and you’re going to be paying mortgage insurance on an FHA loan no matter how much you put down.

The VA loan does not technically call their insurance mortgage insurance, rather they have it classified as a one-time funding fee, unlike the other two groups which are reoccurring. The VA guarantees that the lenders will be made whole. Their premiums are basically gathered by these funding fees. That being said, as veterans, if you are disabled, most of the time you will be exempt from funding fees.

Can you avoid mortgage insurance?

Combo loans are a common way to avoid mortgage insurance. In these cases, the second mortgage takes on that liability being in the second position. So as long as the first mortgage is 80% of the value on a conventional loan, for example, you would not have mortgage insurance. Now, we don’t typically recommend that, but, in some cases, it may work and may be preferred.

Is mortgage insurance a bad thing?

Mortgage insurance is a wonderful thing! Without it many mortgages would unavailable and there would be fewer homeowners.

Does mortgage insurance affect debt ratios?

Yes, mortgage insurance does affect your debt ratios, which are between your monthly debt and your monthly income. Mortgage insurance rates themselves are based on the loan amount, your credit score, and the loan to value.

Can you use gift funds to hit the 20% ratio?

Absolutely! It doesn’t matter where the money comes from, as long as your down payment is 20% or more you can avoid the mortgage insurance.

Gift funds can be used in other cases as well, say you’ve closed the loan and you put 5% down and then a month later you get a gift from your dad or a month later you sell your existing home. Either way, if you’re coming into money, you can just do a large principal reduction and the bank will automatically and by law — on conventional loans — have to remove the mortgage insurance when your loan balance reaches 78% of the original value.

We’ve had some people actually come in and put 5% down to get that little bit better closing cost factor, that little bit better interest rate, and then after the loan closes, they wait the two months that they’re required to wait and then they actually end up paying that extra 15% down. This is an insider trick. Basically, if you put 19.5% down, you can pay a little bit of mortgage insurance. We had a borrower once who had a $300,000 loan and was only going to be paying around $20 in mortgage insurance for just a couple of months and then was going to do a principal reduction down to 78%. By doing this, they got the benefit of a lower closing cost, a lower interest rate, and they only had to pay 20 bucks a month extra for like three or four months. If you want this, just give us a call and say you want the insider special and we’ll help you out.

If you have any questions about this or if you have any questions you’d like us to answer on our podcast, you can email your questions to team@azmortgagebrothers.com or give us a call at (602) 535-2171. Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

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Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.

Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.

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