Mortgage Insurance: Friend or Foe -PART I

What the Heck is MI….Anyway! Be glad we have Mortgage Insurance (MI) today. MI is providing opportunities for home buying. Creative loan structuring by most all lenders from 1999-2007 greatly reduced the number of loans with mortgage insurance. There has never been more of a need for mortgage insurance than the present. I hope the information below provides the purpose of mortgage insurance, clarification of terminology on the major three types of financing (Conventional, FHA, VA) and when a buyer can request for MI to be dropped. Mortgage Insurance (MI) is used to diversify the risk of foreclosure for a lender. Many people see MI as penalty or useless to the buying process. I completely understand their perspective. In economic prosperity MI is seen less as benefit but rather an ugly, unwanted necessity. However I would like to suggest MI is a reason that today people can still get residential financing with less than 20% down. If the risk was not diversified for the banks making home loans, minimum down payment requirement would easily be 20%. Today very few if any borrowers in metro Atlanta can get a primary residence 95% conventional loan with mortgage insurance, which proves my point that without PMI (private mortgage insurance) more money is required for down payment. While lenders are willing to lend to borrowers with 5% down the MI companies are not (except on rare occasions). Additional proof of what the mortgage lending landscape looks like when MI companies do not participate in loans is in the arena of second homes and investment properties. In the majority of cases on both of these classifications, 20% down payment is required, which eliminates the need for mortgage insurance. It appears that for the foreseeable future, mortgage insurance will be issued on primary residences with at least 10% down. In time as the real estate market begins to heal I hope we see a MI companies reenter the game and issue MI on primary residences for 95% conventional financing as well as second homes and investment properties. When will that be? Once home values start to rise again and foreclosure rates drop.