Mortgage insurance is not to be mistaken as homeowners insurance. Just like many clients, don’t be confused if you’ve asked, “What’s mortgage insurance and why do I have to pay for it?” Mortgage insurance is required for most home loans that don’t have at least 20% equity, which is based on an appraised value.

It’s paid by the homeowner on a monthly basis which is built into the total mortgage payment. It’s there to protect the investor because of the risk of foreclosure on the loan. VA loans are the only loans that do not have mortgage insurance. Conventional mortgages have private mortgage insurance also known as (PMI). FHA loans have a different insurance name and that’s called mortgage insurance premium, also known as (MIP).

  • Conventional Loans – Private Mortgage Insurance (PMI): Conventional loans require a borrower to pay PMI when there is not at least 20% equity in the home. There are ways of getting around paying PMI, so have no worries. If you have a credit score of at least 680 and a minimum of 5% equity in the home, you can do a conventional loan with no PMI.
  • FHA Loans – Mortgage Insurance Premium (MIP): While conventional loans are more strict about underwriting guidelines, FHA-insured loans are more flexible, but also come with mortgage insurance. While there are ways to avoid PMI with conventional loans, there is no way to avoid MIP on FHA loans. If you have less than 10% equity in the home, then the MIP will be on the mortgage for the life of the loan. If you have more than 10% equity in the home, then the MIP will be removed after 11 years, along with a loan to value ratio of 78% or below.

If you can qualify on a conventional loan, that is the way to go. FHA is still a great loan option if there are certain qualifying issues. We can always start with FHA and then refinance to a conventional loan, without mortgage insurance down the road.

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