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Maryland Home Search:
Low Down Payment
Simply put, mortgage insurance protects
the mortgage company against financial loss if a homeowner
stops making
mortgage payments. Mortgage companies usually
require insurance on low
down payment loans for protection
in the event that the homeowner fails to make his or her
payments. When a homeowner fails to make the mortgage
payments, a default occurs and the home goes into
foreclosure. Both the homeowner and the mortgage insurer
lose in a foreclosure. The homeowner loses the house and
all of the money put into it. The mortgage insurer will
then have to pay the mortgage company's claim on the
defaulted loan.
For this reason, it is crucial that the family buying the
home can really afford it, not only at the time it is
purchased, but throughout the time period of the loan.
Although the cost of the mortgage insurance is paid by the
home buyer, or borrower, the mortgage insurer works
directly with the mortgage company. Mortgage insurance is
available to commercial banks, savings & loans and
mortgage bankers, all of whom offer mortgage loans to home
buyers.
Remember that mortgage insurance is not the same as credit
life insurance, also called mortgage life insurance. This
type of policy repays an outstanding mortgage balance upon
the death of the person who took out the insurance policy.
The Secondary Market
The mortgage company's decision to use mortgage insurance
is driven by the requirements of investors in the mortgage
market. Because of the losses that could occur, major
investors require mortgage insurance on all loans made
with low down payments.
The three primary investors in home loans are Federal
National Mortgage Association (Fannie Mae), Federal Home
Loan Mortgage Corporation (Freddie Mac) and Government
National Mortgage Association (Ginnie Mae). By purchasing
and selling residential mortgages, Fannie Mae and Freddie
Mac help keep money available for homes across the
country.
Unlike Fannie Mae and Freddie Mac, Ginnie Mae does not
actually buy mortgages. It adds the guarantee of the full
faith and credit of the U.S. Government to mortgage
securities issued by mortgage companies.
The Two Choices: Government Insurance and Private
Insurance
Now that we have explained how mortgage insurance works
and why it is necessary, let's look at the basic kinds of
mortgage insurance. Low down payment mortgages can be
insured in two ways, through the government or through the
private sector. Mortgages backed by the government are
insured by the Federal Housing Administration (FHA), the
Department of Veterans Affairs (VA) or the Farmers Home
Administration (FmHA).
Although anyone can apply for FHA insurance, the other two
government mortgage guarantee programs are much more
targeted. The VA program is limited to qualified, eligible
veterans and reservists. This program is very specialized,
so contact your mortgage professional for the details. The
FmHA insures loans for the construction and purchase of
homes in rural communities.
Obtaining conventional financing is the alternative to
obtaining a home loan backed by the government.
Conventional mortgages are all home loans not guaranteed
by the government, including those guaranteed by private
mortgage insurers.
Although government and private insurance are based on the
same concept of allowing families to get into homes with
less cash down, there are many differences between the
two. Often, your mortgage professional will play an
important role in suggesting and deciding which insurance
is selected.
Home buyers must make a down payment of at least 5% of a
home's value to be considered for private mortgage
insurance. However, under some special programs, the down
payment requirement allows the buyer to use a gift or
grant to cover 2% of the 5% down payment required by
private mortgage insurers. The gift or grant may come from
a friend, relative, community group or other organization.
Private mortgage insurance is available on a wide variety
of home loans and there is no preset limit on the loan
amount. Although differences such as these may affect
whether the mortgage company prefers to work with
government or conventional mortgages, your mortgage
professional will discuss which one would be better for
your situation.
With the wide variety of loans available, home buyers have
the freedom to choose the type of loan that best suits
their needs. Early on in the home buying process, it is a
good idea to meet with several companies to compare the
types of mortgages they offer and shop for the best price
and terms. Best of all, working with a mortgage insurer
can be very easy, whether your loan is insured by the FHA
or a private mortgage insurance company, because your
mortgage professional handles all of the arrangements.
By making lending money to home buyers safer, mortgage
insurance helps more families get into homes of their own.
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