(1) If a homebuyer makes a down payment of less than 20% of the purchase price of a home or is the recipient of an FHA or USDA loan, they’ll usually be required to pay mortgage insurance. It lowers the risk of a lender giving you a loan, but it also increases the cost of the loan.
(2) Mortgage insurance protects the mortgage lender against loss if a borrower defaults on a loan. Private mortgage insurance is required for borrowers of conventional loanswith a down payment of less than 20%. FHA loans and VA loans are essentially public mortgage insurance, as borrowers pay higher insurance premiums in exchange for a low down payment. These funds allow the FHA to insure lenders against losses if borrowers default on FHA-approved loans.
Mortgage insurance costs are included as part of the monthly loan payment. FHA-insured loans have two mortgage insurance components: an upfront premium and a monthly payment. The upfront premium is paid at closing, whereas the monthly payment is paid until the borrowers reach a certain loan-to-value ratio on their mortgage loan, based on the final sale price of the home.