Mortgage insurance issues you want to know about

My lender is insisting on mortgage insurance before I can get the mortgage on the home I want. What is it, and can I refuse?

You probably cannot refuse to get mortgage insurance and still get the loan you want from the lender. Most lenders are requiring mortgage insurance if the buyer is not putting a 20% down payment on the property.

The requirement for mortgage insurance is a result of the housing market cooling and the lenders reassessing how they loan money. In this tightening market the free-form creative financing that was available a few years ago has dried up.

First-time home buyers, those with credit flaws, and those with small down payments who are correctly selecting the conventional fixed rate mortgage are being directed to a fixed rate mortgage backed by private mortgage insurance (PMI). The PMI is paid for by the borrower as a monthly fee. Your mortgage lender will probably include this in your monthly mortgage payment as your property taxes and house insurance already are.

The PMI monthly fee is typically a set percentage of the total mortgage loan. If in the future you are unable to repay the mortgage loan, then the lender is assured of getting some of its money back. It is a way for a mortgage lender to be secure in loaning money to a borrower who may not qualify under current guidelines.

What is a lender’s escrow account and how does it affect my mortgage?

Your lender will create an escrow account for your real estate taxes and homeowners’ insurance. A portion of each mortgage payment will be put into this account to cover the annual charge for real estate taxes and insurance. An escrow account is good because it is a way for you to budget over twelve months for annual bills. However, this does increase your monthly mortgage payment.

I was rejected by the mortgage lender. Now what?

If possible, see if you can find out why you were rejected and correct the problem. Your real estate agent may have other lenders for you to contact.

However, if the rejection is due to a tiny down payment, lack of sufficient income, excessive debts, or anything that indicates you are financially overextended, you may need to stop house hunting and concentrate on fixing the problem. It may take a year or two for you to reduce your current debts and save for a larger down payment. Of course, another option would be to look for a less expensive house.

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