Mortgage Insurance FAQs: Your Questions Answered

Posted on June 4, 2019

Over 450,000 homes were sold in 2018 in Canada. Many of these people were first-time home buyers seeking out a mortgage loan. 

Getting a mortgage is a complex process. First, you have to get approved for a mortgage by providing documentation. Then, you have to decide which mortgage loan is right for you. 

After that, you have to determine if you need mortgage insurance. This leads many to search for mortgage insurance faqs. Getting these questions answers is not only crucial to the mortgage process but also for your peace of mind. 

Buying a home is an exciting time in someone's life. It's easy to get lost in the mound of documents and information. But, we must still remain grounded to understand what we're signing up for. 

If we don't completely understand, then we may be unpleasantly surprised later on. This is especially true if our monthly bills are higher than we thought they would be.

Mortgage insurance is one such component that we need to thoroughly understand. And, if you have questions about mortgage insurance, then you're certainly not alone.

Read on to find out the answers to mortgage insurance faqs.

Mortgage Insurance FAQs: Your Questions Answered

Many people in search of purchasing a home have never heard about mortgage insurance. Mortgage insurance provides lenders with protection during foreclosure. It is completely separate from mortgage protection insurance

Foreclosure is a process no homeowner wants to face. Foreclosure occurs when a homeowner is unable to make their mortgage payments. As a result, the bank or lender begins a process of repossessing the home. 

Foreclosure is one of the greatest fears of any homebuyer. No one intends to go through foreclosure, but sometimes life has other plans. Someone may lose their job, get sick, or lose a loved one. 

This may cause someone to be unable to work or find adequate work. When this occurs, they may be unable to make their mortgage payments. 

But, is mortgage insurance required for everyone? Is it useful for preventing or stopping foreclosure? Explore more mortgage insurance faqs below. 

1. What is Mortgage Insurance?

Mortgage insurance is also known as "mortgage default insurance." It is an insurance policy that protects your lender. It insures the lender in case the borrower defaults. 

Mortgage insurance is sometimes necessary to get a home. Mortgage lenders are always determining the risk level of a borrower. If the risk is too high then may deny the loan request or require you to pay mortgage insurance. 

This risk level is determined by your down payment. If your down payment is less than 20% then this is considered a high-ratio loan. 

Getting mortgage insurance may seem like it doesn't benefit you. But, it does allow you to receive a mortgage loan that otherwise you wouldn't have been able to afford. 

Mortgage insurance also offers lenders and insurers legal recourse.

2. How Do I Get Mortgage Insurance?

You can only get mortgage insurance if your lender requires it. Lenders will require mortgage insurance when your down payment is less than 20% of the loan amount.  It is not something you will need to shop for.

You cannot get mortgage insurance on your own. Only the lender can get mortgage insurance. You will pay the mortgage insurance in the manner dictated by your lender. 

The lender will also choose which mortgage insurance company to use. They will apply for mortgage insurance. The mortgage insurance company has a right to deny the mortgage insurance application. 

This means that you may qualify for a mortgage but not mortgage insurance. In this case, your lender can use a different mortgage insurer. They may also require you to make a higher down payment or not provide you with a mortgage loan altogether. 

3. What Does Mortgage Insurance Do?

Mortgage insurance protects the lender in case you default. When someone defaults on their mortgage someone is required to pay the remainder of the loan. Since you cannot pay this immediately, the lender will make a mortgage insurance claim. 

This mortgage insurance claim will then pay for the loan amount. If the sale of the home after default doesn't cover the remainder of the mortgage, then the insurer or lender may seek legal recourse against the borrower. 

Mortgage insurance also isn't just required by the mortgage lender. In Canada, mortgage insurance is required by law by all persons paying less than 20% on a down payment. The minimum down payment in Canada for a home is 5%.

4. What Types of Properties Need Mortgage Insurance?

All types of properties need mortgage insurance if the lender requires it. This means that condos, duplexes, and traditional homes are all subject to loan insurance. 

One exception is if the property is an investment property. Investment properties are purchases in which the borrower will not be living in the home. These types of purchases always require a 20% or more down payment. 

Investment properties also require an amortization period of fewer than 25 years. 

Another exception to this rule is if the property is valued at more than one million dollars. 

What determines who needs mortgage insurance is the down payment amount. If the amount is less than 20% of any mortgage purchase then the borrower will need mortgage insurance. The type of property doesn't matter, it's only the down payment, loan value, and risk level that does. 

However, some lenders may still require mortgage insurance despite having a 20% down payment. This is sometimes determined by the type of property you're purchasing. Speak with your lender to learn more about their specific policies. 

5. Who Pays for Mortgage Insurance? 

Your lender will pay the loan premium to the mortgage insurer. This amount will then be added to your closing costs or to your monthly mortgage payment. Speak with your lender and learn more about their repayment policies. 

The price of the mortgage insurance will be based on the loan to value ratio. This amount is determined by your lender, the price of the home, and your down payment. 

Your lender will pay the cost and then pass them on to you. The exact price of mortgage insurance varies based on a number of factors specific to the home transaction and individual circumstances. 

6. Does Mortgage Insurance Allow Me to Make a Lower Down Payment?

Mortgage insurance does allow borrowers to make a lower down payment. This is the greatest benefit to borrowers. Mortgage insurance allows borrowers to get a mortgage with a down payment of less than 20%. 

This allows potential home buyers to get a home more quickly. It can be difficult for some to save 20% for a down payment. Mortgage insurance allows home buyers to purchase the home of their dreams without needing to wait. 

While you'll still need to pay for the value of the mortgage insurance, you'll be able to purchase a home with a lower down payment. 

7. Does Mortgage Insurance Affect My Interest Rate?

Mortgage insurance allows you to get a reasonable interest rate. Mortgage insurance allows your lender to give you a competitive mortgage interest rate on a high-ratio loan. 

This is because lenders take on less risk by sharing the risk with the mortgage insurer. This is a huge benefit to you as a homebuyer because you'll be paying less interest over the term of your mortgage loan. 

8. How Is Mortgage Insurance Helpful to the Economy?

Mortgage insurance is helpful for the economy because it stabilizes the housing market. It allows homebuyers to secure a mortgage so they can participate in the housing market. Simply put, if everyone was required to make a down payment of 20% then home sales would likely be lowered dramatically. 

Many people aren't able to save a 20% down payment. Others may not feel comfortable spending all their savings on a home purchase. Mortgage insurance allows for these circumstances to be amended. 

This then benefits lenders, the economy, and homebuyers. 

Mortgage Insurance FAQs: Answers and Peace of Mind

The more we learn from mortgage insurance faqs, the more confident we feel. And, when purchasing a home, this kind of confidence can help us to make sound decisions. 

Many home buyers would like to avoid mortgage insurance completely. Others consider it to be a necessary evil when purchasing a home. No matter where you stand on mortgage insurance, it can allow you to purchase a home more quickly. 

The fact of the matter is not everyone can save 20% for a down payment. Some have other debts to pay off or children to provide for. Mortgage insurance allows these populations to receive a mortgage loan.

It also allows the lender to feel more at ease by providing a mortgage loan. 

If you're buying a new home and have mortgage insurance on your current loan, then you may be able to receive added benefits. The mortgage portability option can allow repeat mortgage insurance users to save money. This is achieved by reducing or eliminating premiums on the new loan. 

The mortgage portability option only applies to homes with mortgage insurance purchased after April 1st, 1996. Check with your lender to learn more about mortgage loan portability. 

Interested in learning about homeowners insurance? Check out our blog post to learn more. 

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