Mortgage insurance (also known as mortgage guaranty) is an insurance policy which compensates lenders or investors for losses due to the
default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a
mortgage indemnity guarantee (MIG), particularly in the UK.
For example, Mr. Smith decides to purchase a house which costs $150,000. He pays 10% in $15,000 downpayment and takes out a $135,000
mortgage. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale
price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects the lender against his
default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the 135,000, or $33,750,
leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by
either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750
of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.
To obtain public mortgage insurance from the Federal Housing Administration, Mr. Smith must pay a mortgage insurance premium (MIP) equal
to 1.75 percent of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower's behalf.
Depending on the loan-to-value ratio, there may be a monthly premium as well. The United States Veterans Administration also offers insurance
on mortgages
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