Makes Low Down Payment Loans Possible?
Simply put, mortgage insurance
protects the mortgage company against financial
loss if a homeowner stops making mortgage
payments. Mortgage companies 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 mortgage company'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 mortgage company. 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 mortgage company'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 (Ginnie Mae).
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 mortgages. It
adds the guarantee of the full faith and
credit of the U.S. Government to mortgage
securities issued by mortgage companies.
The Two Choices: Government Insurance
and Private Insurance
Now that we have explained how mortgage
insurance works and why it is necessary,
let's look at the basic kinds of mortgage
insurance. Low down payment mortgages can
be insured in two ways -- through the government
or through the private sector. Mortgages
backed by the government are insured by
the Federal Housing Administration (FHA),
the Department of Veterans Affairs (VA)
or the Farmers Home Administration (FmHA).
Although anyone can apply for FHA insurance,
the other two government mortgage guarantee
programs are much more targeted. The VA
program is limited to qualified, eligible
veterans and reservists. This program is
very specialized, so contact your mortgage
professional for the details. The FmHA insures
loans for the construction and purchase
of homes in rural communities.
Continued at http://www.faircommunitylending.com/library.html?category=downpayment&article=1010&