| Simply put, mortgage insurance
protects the mortgage lender against financial loss if a homeowner stops
making mortgage payments. Lenders usually require insurance on low down
payment loans for protection in the event that the homeowner fails to
make his or her payments. When a homeowner fails to make the mortgage
payments, a default occurs and the home goes into foreclosure. Both the
homeowner and the mortgage insurer lose in a foreclosure. The homeowner
loses the house and all of the money put into it. The mortgage insurer
will then have to pay the lender's claim on the defaulted loan. For this reason, it is crucial that the family
buying the home can really afford it -- not only at the time it is
purchased, - but throughout the time period of the loan. Although the cost of the mortgage insurance is
paid by the home buyer, or borrower, the mortgage insurer works
directly with the lender. Mortgage insurance is available to
commercial banks, savings & loans and mortgage bankers, all of whom
offer mortgage loans to home buyers. Remember that mortgage
insurance is not the same as credit life insurance, also called mortgage
life insurance. This type of policy repays an outstanding mortgage
balance upon the death of the person who took out the insurance policy. The Secondary Market The lender's decision to use mortgage insurance
is driven by the requirements of investors in the mortgage market.
Because of the losses that could occur, major investors require mortgage
insurance on all loans made with low down payments. The three primary
investors in home loans are Federal National Mortgage Association
(Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and
Government National Mortgage Association (GNMA). By purchasing and
selling residential mortgages, Fannie Mae and Freddie Mac help keep
money available for homes across the country. Unlike Fannie Mae and Freddie Mac, Ginnie Mae
does not actually buy the mortgages. It adds the guarantee of the full
faith and credit of the U.S. Government to mortgage securities issued
by private lenders. |
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