What 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.
Obtaining conventional financing is the alternative to obtaining
a home loan backed by the government. Conventional mortgages are
all home loans not guaranteed by the government, including those
guaranteed by private mortgage insurers.
Although government and private insurance are based on the same
concept of allowing families to get into homes with less cash down,
there are many differences between the two. Often, your mortgage
professional will play an important role in suggesting and deciding
which insurance is selected.
Continued at http://www.faircommunitylending.com/library.html?category=downpayment&article=1010&
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