Mortgage Insurance is the special insurance provided to investors or lenders, compensating them in case of default of loan, all the losses incurred due to it. Lenders usually insure for mortgage loan, whose value exceed 80% of the value of mortgage property. The mortgage insurer charges premium for it, paid by lender or borrower depending upon the contract. In case of default, the property is sold at loss and insurer will take the first $33,750 in coverage. It is trusted by regulators and lenders as a dependable partner for high value lending transactions. It encourages growth of data-driven and risk-oriented property market. It helps in making home-ownership possible, through low initial down payment and replacing private guarantees.

This insurance should not be taken as mortgage life insurance that pays back the loan in case of borrowers’ death like a life insurance policy. It is also not like payment protection coverage that gives income support in case of involuntary employment or any disability caused to borrower like in credit insurance.

Premiums paid in mortgage insurance are generally shown in terms of basis points, the base rate of which is determined by LTV ratio and other corresponding factors like occupancy status, loan purpose, credit rating, property type, mortgage size, employment status etc and base rate is multiplied by the original loan amount i.e. the principal amount. Premiums paid is the reflection of past of mortgage performance of an individual lender.

Cancellation of Insurance: The mortgage insurance can be canceled in case payment of 80% of the original price of mortgage property or appraised home value at the time of taking loan whichever is less has been made, past records show good payment history, and evidence regarding no loss in the value of mortgage property is given. The request for cancellation can be given and depending on the individual case, it can be canceled.

Importance of mortgage insurance: Apart from supervisory benefits, it is important for all the participants in mortgage lending transactions. It helps in reducing the non-price credit rationing by:

  • Acting as a risk converter to normalize the risk for investors of mortgage property.
  • Acting on the behalf of investors as investors’ eyes and giving credit enhancement sources.
  • Giving high rated risk coverage to investors, through commitment of risk capital for long duration of time.
  • Improving the management of mortgage process by staking personal capital at risk to ensure valuation of property and implementation of management systems done effectively.
  • Improving the risk selection process through encouraging use and collection of database information and applying effective risk-decision techniques.
  • Encouraging responsible lending without additional supervisory authority.
  • Boosting high quality credit demand to distribute credit properly.
  • Transferring risk from banking industry to well regulated and highly solvent third parties.