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The Importance of Mortgage Insurance

By Tiffany Raiford

Paid by a homeowner, mortgage insurance is a guarantee that in the instance a homeowner defaults on his mortgage, placing his home into foreclosure, the mortgage company will recoup its loss. Mortgage insurance is typically required for any buyer obtaining a mortgage with a low down payment. It is a way of insuring that North Carolina mortgage lenders do not lose out when issuing loans to those who cannot afford to provide a large down payment.

How Mortgage Insurance Works

The way in which mortgage insurance works is fairly cut and dried. When a homeowner applies for a mortgage in the State of North Carolina, the lender of the mortgage works directly with the mortgage insurance provider to obtain coverage on the amount of the loan. The premium is included in the monthly mortgage payment made by the homeowner, though the homeowner does not work with the insurance company. Any lender that provides home loans to North Carolina residents can obtain mortgage insurance. It is available to any commercial bank and mortgage banker in the state.

Who Benefits from Mortgage Insurance

Lenders are the party that benefits from mortgage insurance. When a lender loans money for a home to a buyer, the lender is risking those funds. Repayment hinges solely on the borrower, meaning that the lender loses that money if the borrower decides he can no longer afford to pay for his mortgage or simply decides he no longer cares to pay for his mortgage. Once a borrower stops making mortgage payments, the mortgage goes into default. Once in default, foreclosure proceedings begin. When a home is foreclosed, the lender takes ownership and is responsible for the loss on the sale of the house once a buyer places on offer. Lenders benefit from mortgage insurance.

Types of Mortgage Insurance

Low down payment mortgages are typically insured and backed by the federal government, though they can be insured privately. The Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Farmers Home Administration (FmHA) are government funded programs that offer mortgage insurance to borrowers who make low down payments. FHA loans are available to all borrowers. However, VA loans are specifically targeted toward qualified veterans. FmHA loans are only available to borrowers constructing or purchasing rural homes. Finally, special private mortgage insurers fund loans to borrowers who put 5 percent down. The catch is that 2 percent of that down payment must be gifted from a friend, relative, or community organization. Regular private mortgage insurance is available to anyone at the discretion of the provider.

Mortgage insurance is vital. Any lender providing home loans to borrowers with low down payment mortgages must insure their investment. In case a borrower stops making mortgage payments, lenders must be able to recoup their losses on the loan. Because buyers do not benefit from mortgage insurance, lenders must work directly with mortgage insurance companies.

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