In the evil alphabet soup of mortgage related acronyms we find a few well known ones, some respected ones, some desirable ones, and then there are these. Why we all love to throw around LTV and DTI. Insiders are very familiar with SRP (our money) and CTC (Clear To Close) and virtually everyone knows YSP and RESPA.
So what is with these three letters, I, M and P, and how do they affect my mortgage?
Let's start with I. In this case I stands for insurance. Not the kind of insurance that helps you if your property is damaged or if you are burglarized. Not even the kind that helps you if you missed a payment or two. No, those types of insurance are certainly available but this insurance is designed to help only the note holder. That's right this insurance is designed and in place to mitigate the risk to your lender.
Next is M. The M stands for mortgage. If you do not have a mortgage none of this is relevant. If you have a conventional mortgage with the loan amount to the value of the property ratio less than 80% this point is also moot. Otherwise, if you have a mortgage and the equity or down payment is less than 20% keep reading.
Finally is P. Regardless of what type of insurance you have bought you have heard and are likely familiar with the word Premium. This is the cost, to you, of purchasing this insurance and in this case it is mortgage insurance you are purchasing.
What is the purpose of mortgage insurance?
When a lender makes a loan they examine the risk to their depositors or investors. If the loan presents to much risk there needs to be some mitigating circumstance to limit the risk and that's where mortgage insurance comes into play. Without mortgage insurance many loans would never be made. The insurance does not protect the buyer but rather the lender against the buyer.
Mortgage insurance is underwritten along with the loan but always adds an extra layer of qualifications to the applicant. For example even though Fannie Mae may only require a score of XXX the mortgage insurer may require a score of XZZ. The same goes for late payments in mortgage history, income levels compared with debt and amount of liquid assets available.
Recently mortgage insurance companies have "taken a beating" because of the high number of defaults on mortgages across the nation. This has resulted in a necessity for increased rates and tightened qualifications. In the end everyone who is buying today is paying the price for the failures in the past.
The major insurers today are, The Federal Housing Association (FHA), Radian, Genworth, MGIC, UG, RMIC and PMI.
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