Mortgage Insurance for Government Loans
FHA Home Loans:
Similar to conventional home loans, FHA insured mortgages require mortgage insurance. The mortgage insurance, referred to as mutual mortgage insurance (MMI), charges 0.5% per year of the loan amount. In addition to the mutual mortgage insurance that is charged to the home owner each month, FHA charges an upfront mortgage insurance premium (MIP) ranging from 1.75% for first time home buyers to 2.25% for 30 year fixed rate mortgages. It is important to note that any unused portion of the upfront MIP may be refunded within the first 84 months of the loan.
Beginning January 1, 2001, the upfront mortgage insurance premium charged by FHA will be be reduced to 1.50% of the loan amount. Furthermore, the monthly mortgage insurance payment will automatically be cancelled when the outstanding principal balance reaches 78% of the original purchase price (provided that the monthly mortgage insurance payments have been made for a minimum of 5 years for 30 year loans). 15 year mortgages where the home buyer makes a down payment greater than 10% of the purchase price will not have to pay the monthly mortgage insurance.
The following is a table of the upfront MIP and monthly mortgage insurance percentages for FHA home loans:
For 30 year loans originated before January 1, 2001
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For 30 year loans originated after January 1, 2001
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For 15 year loans originated before January 1, 2001
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For 15 year loans originated after January 1, 2001
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VA Home Loans:
The U.S. Department of Veteran’s Affairs (VA) guarantees 25% of the loans by qualified lenders to eligible veterans. This guarantee negates the need for any monthly mortgage insurance payments.
However to cover the costs of the program, VA charges a funding fee for each loan (unless the veteran is a qualifying disabled veteran) which varies with the down payment, the type of veteran, and if the loan is a purchase, rate/term refinance or cash-out refinance.
The following table breaks down the funding fee charged by VA:
First time use, purchase of an eligible property
| Down Payment | Active Duty | Reserves/NG |
| 0% to 4.99% | 2.00% | 2.75% |
| 5% to 9.99% | 1.50% | 2.25% |
| 10% + | 1.25% | 2.00% |
Second time use, purchase of an eligible property
| Down Payment | Active Duty | Reserves/NG |
| 0% to 4.99% | 3.00% | 3.00% |
| 5% to 9.99% | 1.50% | 2.25% |
| 10% + | 1.25% | 2.00% |
Private Mortgage Insurance 101
Before the advent of mortgage insurance, the average home buyer was required to put a minimum of 20% down to purchase a home. This sizeable down payment reduced a lender’s risk in the event of foreclosure or default of the loan by creating a large enough equity position in the home to cover the cost of selling the home, recovering any expenses incurred during the foreclosure process, and adding a little profit into the margin.
In the 1950′s several entrepreneurs began testing the market for mortgage insurance. In May of 1956, Congress passed legislation expanding the role of FHA and in 1957, the first modern day mortgage insurance company opened in Milwaukee and opened the door to the beginning of low down payment conventional loans. Progress was slow until 1971, when a regulatory authorities expanded lending limits for conventional loans, up to 95% of appraised value.
Private mortgage insurance (also known as PMI) protects lenders against loss due to foreclosure. This protection allows lenders to offer more mortgage loans with low down payments (and in some cases, no down payments). Private mortgage insurance is not life insurance, as some insurance agents would like you to believe. Private mortgage insurance only protects the lender. Mortgage life insurance protects your home and family by paying all or a portion of the mortgage in the event of your death.
For many home buyers, private mortgage insurance is a necessary evil. There is no benefit to the home buyer. Though the amount paid each month is determined by the type of loan and the percentage the home buyer puts down, most home buyers will have one form of mortgage insurance or another.
However, the Federal Government passed the “Homeowner’s Protection Act of 1997″ that reformed the then current private mortgage insurance regulations. The key provision of this law forces most lenders to automatically cancel private mortgage insurance when the home owner’s mortgage reaches 78% of the home’s original purchase price. Unfortunately this only applied to loans originated after July 29, 1999.
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