What is mortgage insurance (MI)?
For most homebuyers, the biggest hurdle to owning a home is the down payment. Private mortgage insurance, or private MI, can allow you to purchase a home with less down than what otherwise may be required.
Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%. MGIC MI provides lenders a financial guaranty should a loan go into foreclosure. It is this guaranty that allows many lenders not to require a 20% down payment when making home loans.
Here's how it generally works:
- A borrower buying a $150,000 home makes a 10%, or $15,000, down payment.
- The lender then obtains private MI on the borrower's $135,000 mortgage, reducing its exposure to loss from $135,000 to $101,250.
- The private MI covers the top portion of the mortgage – usually the top 25% to 30%. In this case, the MI will absorb 25%, or $33,750, of any ultimate loss to the lender.
While MI provides an obvious benefit to lenders, many times homebuyers will overlook the benefits MI affords them. These can be significant and may include:
- Buying a home sooner – a higher loan-to-value ratio means less time is needed to save for a down payment.
- Increased buying power – if you have a certain amount set aside for a down payment, using MI may help you afford more home than if you put 20% down.
- Expanded cash-flow options – you may put less down and keep cash for other uses (making investments, paying off debt, or paying for home improvements or emergencies).
- Receiving a refund – some MI options allow for a prorated refund of premiums upon cancellation.
- Faster approvals – loans with MI typically are approved sooner than non-MI or government-backed structures.
- Cancelling coverage – many MI options may be cancelled when no longer needed.
MGIC works with partner lenders to provide you several options when it comes to buying a home. Our more popular programs include:
- MGIC Monthly Premiums
- With this option, you would experience no increase in the loan amount and need no additional cash at closing. The premium amount is paid along with your monthly mortgage payment. Your MI coverage can usually be cancelled once your loan amount falls to 75-80% of your home's value.
- MGIC Borrower-Paid Singles
- With this premium plan, you have the option of paying the MI premium in one lump sum at closing and making no monthly MI payments. Depending on your lender's guidelines and your individual situation, you may be able to finance the premium into the loan amount, reducing your closing costs. However, many lenders do not allow for financing the premium into the loan, especially if the borrower is not putting at least 10% down, so this option may require you to bring more to closing.
- MGIC Split Premiums
- Here you pay a portion of the MI premium up front at closing, in order to greatly reduce the amount you pay along with your monthly mortgage payment. Like Borrower-Paid Singles, you may be able to finance the up-front amount. Again, this will depend on the lender and the amount of your down payment. This premium plan is also cancellable.
- MGIC Lender-Paid MI
- As the name suggests, with MGIC's Lender-Paid MI program, your lender pays the MI premium and not you. However, to cover the cost of the premium, your lender may increase the loan fees or the interest rate.
The important thing to remember is that MGIC mortgage insurance gives you options. Buying a home is one of the biggest financial decisions you may ever make. You want to go into that decision knowing all your options.
Private MI is the private sector's alternative to Federal Housing Administration (FHA) mortgage insurance, a government program backed by taxpayers.
Both MGIC MI and the government's FHA program help borrowers purchase homes with a down payment that is less than 20% of a home's value. Both options are available through most lenders. However, choosing the best option will depend upon your individual situation, so it's important to be sure your lender is showing you both options.
As you make your decision, be sure to look beyond differences in the monthly payment or interest rate. While both items are important, a mortgage is not a one-day event. Remember to also consider long-term factors like total financing costs and home equity build-up as you make your choice.
Some advantages MGIC MI may be able to provide you:
- Save thousands of dollars in total MI expense and increase your home equity, not your loan amount
FHA requires an up-front premium that often is financed into the loan, increasing your loan amount and your long-term debt obligation. With MGIC Monthly MI there is no up-front MI premium payment, which saves you thousands of dollars in MI premium paid over the life of your loan and immediately puts you in a much better home equity position.
- Lower or comparable monthly payment
Certainly monthly payment is important. Borrowers with good credit scores or who are putting more than the minimum down will find that MGIC MI is a very competitive option over FHA.
- Chance to cancel your MI coverage
For a 30-year mortgage, the FHA will typically not allow you to cancel the monthly MI payment unless you put down 10% or more at the time you took out the loan. And even then you will need to wait 11 years before you can cancel coverage.
However, private mortgage insurance must automatically be cancelled once the loan has reached a certain LTV and the borrower may request to have it cancelled even sooner. In fact, most lenders allow for a new appraisal to determine if you can cancel your MGIC MI and reduce your monthly payment. A new appraisal allows you to take advantage of increases in your home's value linked to home improvements you've made or market appreciation.
- Why did I get a letter about adverse action?
- If you receive an adverse action notice from MGIC, it means that your lender applied to MGIC for mortgage insurance coverage on your loan and, based on a credit score or other credit report information about you provided to MGIC, we determined either not to insure your loan or that the rate we would charge your lender for mortgage insurance would be higher than it would have been if your credit information had been better.
- What information in my credit report caused the mortgage insurance rate to be higher?
- The credit score used by MGIC to determine the mortgage insurance rate applicable to your loan is based on the information in your credit file at the consumer reporting agencies. Credit scores are determined using a model at the time the scores are ordered. Companies do not disclose the formula behind their credit-scoring models, but most scores are based on a combination of several factors, including your credit payment history, how much money you owe, the length of your credit history and other factors. If you order your credit score, ask for the factors that influenced your score.
- How do I dispute the accuracy or completeness of the credit report information about me?
- The name and contact information for the consumer reporting agency that provided the credit score or credit information we used in our underwriting decision is included in your notice. Contact the consumer reporting agency for a free copy of your credit report. You will receive information with the report on how to correct any information in your report that is wrong or incomplete.
- What is the Fair Credit Reporting Act?
- The Fair Credit Reporting Act (FCRA) is a federal law that promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies (sometimes called credit bureaus). FCRA protects information collected by consumer reporting agencies, limits the persons who may obtain consumer credit reports and requires users of such reports to notify consumers when "adverse action" (as defined under FCRA) has been taken on the basis of such reports. Further, users must identify the consumer reporting agency that provided the report so that the accuracy and completeness of the report may be verified or contested by the consumer.
You have a right to obtain a free credit report when you receive a notice of adverse action. You also have a right to receive a free credit report, at your request, once every 12 months from each of the nationwide consumer reporting agencies - Equifax, Experian, and TransUnion.
For more information about your rights under FCRA and how to obtain free credit reports, visit the U.S. Federal Trade Commission's website and search for Fair Credit Reporting Act or FREE Annual Credit Reports.
- What is a credit score?
- Credit scores are numerical ratings that predict how likely you are to make your loan and other credit payments on time. Credit scores are based on the information in your credit report file at one or more of the consumer reporting agencies. The consumer reporting agencies generate credit scores using a scoring model. For more information on credit scores, see the FTC website
- How can I get my credit score?
- You can get your credit score from the three nationwide consumer reporting agencies, but you will have to pay a fee for it. Many other companies also offer credit scores for sale alone or as part of a package of products. For more information, see the FTC website.
- What is mortgage insurance?
- Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%. Private mortgage insurance (private MI) is a financial guaranty business in which an insurer assumes a portion of a lender's risk in making a mortgage loan.
For that risk, the insurer collects a premium from the lender, who then typically recovers the cost of the premium from the borrower. The "risk" in private mortgage insurance is that a borrower will default on a loan and that may ultimately result in the insurer having to pay a claim.
Private MI is the private sector alternative to Federal Housing Administration (FHA) mortgage insurance, a government program backed by taxpayers. Private MI typically may be cancelled sooner than FHA insurance and is available on a wider variety of loan products.
- Who is Mortgage Guaranty Insurance Corporation?
- Mortgage Guaranty Insurance Corporation (MGIC) is the nation's largest provider of private mortgage insurance. We are the founder of an industry that has made homeownership possible for millions of families. Private mortgage insurance makes it possible for buyers to put as little as 3% of the purchase price down to buy a home.
- I did not give you permission to order a credit report about me, so how did you get my credit report?
- The Fair Credit Reporting Act (FCRA) restricts the purposes for which consumer reporting agencies may provide credit reports. You may provide written instructions authorizing a consumer reporting agency to provide your credit report to another person. However, under FCRA, consumer reporting agencies may also provide your credit report without your consent to certain persons, including creditors and insurers in connection with your request for credit or insurance. Because MGIC underwrites mortgage insurance requested in connection with your loan application, MGIC is permitted under FCRA to obtain your credit report.
- How will my credit information affect the mortgage insurance rate?
- Lenders generally charge borrowers for the cost of mortgage insurance. MGIC offers mortgage insurance programs for various types of loans and credit profiles. If you receive a notice of "adverse action" from MGIC, it means that under the program applicable to your loan, the rate we charged your lender for mortgage insurance was higher than our lowest rate based on your credit information. Depending on how your lender recovers the cost of the mortgage insurance premium on your loan, your payments or loan fees may be higher than if the mortgage insurance rate had been lower.
- What if there has been a mistake or incorrect information is in my credit report?
- The rate that MGIC charges your lender for mortgage insurance is based on information provided to MGIC by your lender. Corrected information received before closing can affect the mortgage insurance premium; however, the insurance is effective when the loan is closed. Correcting erroneous information in your credit file is important and may improve the terms of credit and insurance offered to you in the future. For information on how to correct information in your credit file, see the FTC website.