Mortgage Insurance Policy
Among the insurance policies offered by the insurance company, the mortgage policy is especially dedicated for the protection of the lenders.
Mortgage insurance policy also referred to as mortgage guaranty or private mortgage insurance is a type of insurance policy that compensates the protection of the investors or lenders to any possible losses from the default of the borrowers. This insurance may be either private or public depending on the insurer’s choice. Hence, this type of insurance will be bought by the sole lender and the payments or the premium will be included as an additional fee for the monthly payment on the mortgage. Mortgage insurance is usually a requirement for mortgages in which the value of the purchased property is less than 20% of the down payment.
Mortgage insurance started in the 1880’s at the United States. The first law of this type of insurance was passed and given in 1904 at New York. The industry continued to grow to respond the appearance of the real estate and unfortunately reached bankruptcy following the Great Depression. This bankruptcy was associated to the involvement of the industry in the pool of mortgages. Then the government started to implement the insurance of mortgages in the year 1934 by the Veteran’s Administration and Federal Housing Administration. However, right after following the Great Depression, there was no mortgage insurance that was allowed in United States till 1956 when the Wisconsin government passed a new law to allow the Mortgage Guaranty Insurance Corporation and the post-Depression Insurer be chartered. This from then on was followed by the California law in the year 1961 then a model law was created by the National Association of Insurance Commissioners.
In order for someone to qualify in acquiring mortgage insurance, the mortgage should meet the different conditions that are already set by the Federal National Mortgage Association. These set of conditions will include the borrower’s qualifications, the kind of property that was being borrowed and the exact size of what has been mortgaged. Once the set of conditions are being met, the mortgage insured will be eligible to be resold in the big market for mortgage securities. In this way, the lenders will be able to originate and make many more loans than the usual.
The cost amount of mortgage insurance can be included directly within the mortgages in the process referred as Capitalization. In terms of capitalization within this way, the premium rate would become an additional fee of tax deduction in which payments from the mortgage are tax deductable.
However, not all the potential borrowers would be able to afford the down payment of 20% which is necessary to prevent paying the mortgage premiums of the insurance. To assist and hep these borrowers, the best financing strategy called 80-10-10 was established. While the first essential or basic mortgage is at 80% of the value of the property, 10% is reduced to the down payment with the additional funds obtained from the second mortgage. One the equity of the borrower will raise of up to 20%, the mortgages could be merged together without even the need of any mortgage insurance. Another strategy is the 80-15-5 that is made available to possible home buyers that has only 5% enough cash for down payment.