| 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)
or guaranteed by the Department of Veterans Affairs (VA) or the Farmers
Home Administration (FmHA).
The minimum down payment required by FHA is less
than 5%. For single-family homes, the standard limit for an FHA-insured
mortgage ranges from $67,500 to $151,725 (in certain high-cost areas).
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 lender 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, the lender or loan originator will
play an important role in suggesting and deciding which insurance is
selected.
Home buyers must make a down payment of at least
5% of a home's value to be considered for private mortgage insurance.
However, under some special programs, the down payment requirement allows
the buyer to use a gift or grant to cover 2% of the 5% down payment
required by private mortgage insurers. The gift or grant may come from a
friend or relative, or a community group or other organization.
Private mortgage insurance is available on a wide
variety of home loans and there is no pre-set limit on the loan amount.
Although differences such as these may affect whether the lender prefers
to work with government or conventional mortgages, your lender will
discuss which one would be better for your situation.
With the wide variety of loans available, home
buyers have the freedom to choose the type of loan that best suits their
needs. Early on in the home buying process, it is a good idea to meet with
several lenders to compare the types of mortgages they offer and shop for
the best price and terms. Best of all, working with a mortgage insurer can
be very easy -- whether your loan is insured by the FHA or a private
mortgage insurance company -- because your lender handles all of the
arrangements.
By making lending money to home buyers safer,
mortgage insurance helps more families get into homes of their own.
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