Q: I just put down 10 percent toward the purchase of my first home and have just learned that I am being charged for both homeowners insurance and something called mortgage insurance. My loan officer says that home loans made with less than a 20 percent down payment require mortgage insurance that protects the lender against losses if I fail to make my payments. I put up a solid down payment and have been pre-approved for a mortgage, but don't understand why I have to foot the bill for insurance that protects my mortgage lender.
A: Mortgage lenders view home loans exceeding 80 percent of a home's appraised value as riskier, so they require additional protection in the form of mortgage insurance for conventional loans or the mutual mortgage insurance program for FHA loans. Borrowers with VA loans don't pay for mortgage insurance, but are charged a funding fee, which serves the same purpose.
Up the Down Payment
There are a few ways of eliminating mortgage insurance. The most common is to increase your down payment. You may be able to:
- Tap your savings
- Borrow against a 401(k) account (loans against retirement accounts are not counted as debts by mortgage underwriters)
- Get loans or gifts from relatives
- Take out a personal loan (as long as the payment doesn't push your debt-to-income ratio beyond allowable limits, you are allowed to borrow some of your down payment)
- Ask the seller to cover your closing costs and use what you save to increase your down payment
Alternatively, instead of choosing the monthly mortgage insurance than most buyers get, opt for a single premium, which is paid upfront. This eliminates the additional monthly charge, and you may be able to convince the home seller to pay for this.
You may be able to reduce your mortgage insurance requirement if you qualify for a Community Homebuyer mortgage. These are offered by both Fannie Mae and Freddie Mac, but only to first-time buyers who meet income guidelines and take a homebuyer education class.
Finally, buyers of homes owned by Fannie Mae and Freddie Mac may qualify for mortgages with low down payments and no mortgage insurance requirements; Fannie Mae and Freddie Mac also waive lender required appraisals when financing homes they own. Fannie Mae and Freddie Mac act as the seller and mortgage lender in these transactions; this enables them to waive or alter certain customary lender requirements as an incentive to buyers to purchase their homes.