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Mortgage Insurance Explained

Having a down payment of less than twenty percent will not stop you from purchasing a home, but may require mortgage insurance. 

The housing market is an expensive market to enter, and many first-time homebuyers do not have a large amount of cash to use for the down payment. Having a down payment of less than twenty percent will not stop you from purchasing a home, but may require mortgage insurance. This insurance protects lenders against financial losses that result from defaults on home mortgages.

Mortgage insurance is similar to home or auto insurance. It protects against financial loss and requires payment of a premium. If a borrower can't repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the loss. Payments for this insurance are generally made annually or monthly. 

You can purchase mortgage insurance from the Federal Housing Administration (FHA) or from a Private Mortgage Insurer (PMI). If you decide to get mortgage insurance from the FHA, you may be able to reduce the premium by completing the Homebuyer Education Learning Program (HELP), sponsored by the FHA. HELP is structured to assist buyers in purchasing a home, and provide information on such topics as budgeting, finding a home, securing a loan, and home maintenance. Ask your Realtor or your lender for more information about this program.

PMIs offer a variety of programs for borrowers, including programs for low-income borrowers. These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. A PMI will usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.

Sources: www.doityourself.com; Myers Internet Services, www.mortgagefaq.com, Department of Housing and Urban Development, www.hud.gov.