What Is Mortgage Insurance?

A staple of the home-buying process is buying mortgage insurance—an expense that falls to the prospective homebuyer.

But before we get in too deep, let’s make one thing crystal clear: more often than not, mortgage insurance protects the lender or the home’s titleholder, and not the borrower. (Except, as we’ll see, in the case of mortgage title insurance.)

Why? Because borrowers can be unpredictable, even in the best of circumstances.

Mortgage insurance shields lenders and titleholders from any negative financial ramifications should the borrower neglect to fulfill their financial obligations as outlined in their initial contract.

If the borrower passes away unexpectedly, or defaults on their payment, or cannot meet the terms of their contract for some other specified reason, then those on the receiving end of those mortgage payments are covered by the policy and won’t suffer any major financial losses.

There are three types of mortgage insurance available, including:

Let’s explore each of these options in further detail.

Mortgage Title Insurance

Sometimes, there are liens on the property or other hidden title issues that can stall or totally derail the home-buying process.

That’s where mortgage title insurance comes in handy.

If it turns out that the property does not, in fact, belong to the seller—or if lien issues outlined above come into play—mortgage title insurance protects lenders and buyers against any financial losses incurred as a result of these problems.

Private Mortgage Insurance (PMI)

If you’re pursuing a traditional mortgage, then you may have to invest in private mortgage insurance (PMI) to continue with the process. (This is usually required by the lender if you paid less than 20% as a down payment on the property.)

The cost of PMI varies depending on your credit score and other elements of your application, like the amount associated with your home loan.

Qualified Mortgage Insurance Premium

This is only pertinent for those who have received mortgages backed by the Federal Housing Administration (FHA); if you have an FHA-backed mortgage, you must pay a qualified mortgage insurance premium, which protects qualified lenders who are supporting “high-risk” loan seekers.

Want to bypass the whole mortgage insurance process altogether?

Then you’re going to have to put more than 20% down toward the purchase of your future home and pursue a conventional mortgage, or otherwise explore programs available for first-time home buyers, which may not have strict mortgage insurance requirements.

Good luck on your home-buying adventure!