A policy that protect a mortgage lender if the borrower defaults on (does not repay) a mortgage.
Mortgage insurance is almost always required whenever borrowers finance more than 80 percent of a home’s value or purchase price. For conventional (non-government) mortgages, insurance can be purchased from private insurers, and in that case it’s called private mortgage insurance or PMI.
In that case, the borrower is evaluated not just by the lender, but also by the mortgage insurer. The cost of mortgage insurance is based on the borrower’s credit score and the loan-to-value of the loan.
Mortgages can also be insured by government agencies:
- FHA insurance is called MIP or mortgage insurance premium, and it includes an upfront fee and an annual premium.
- VA insurance is called a funding fee and is only paid once.
- USDA (Rural Housing) insurance premiums are called guarantee fees and include an upfront fee and an annual premium.
Mortgage insurance is not for the borrower’s protection; it’s for the lender, and it kicks in if the proceeds from a foreclosure sale don’t cover what the lender is owed – the mortgage insurance covers some or all of the loss.