Mortgage Insurance FAQs: Your Questions, Answered

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.

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. 

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%.

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. 

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. 

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. 

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.

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.