Primate Mortgage Insurance Protects the Loan Lender

A Home Buying Article Contributed by Elizabeth Fox-Wise

Most Mortgage Lenders Will Require You Have a Sizable down Payment to Get the Loan

Typically, if you are seeking a mortgage loan, the lender will want you to have a sizeable down payment towards the home that you are purchasing. Many mortgage loan lenders will require that you put a cash down payment on the home that is equal to at least twenty percent of the market value of the home. By requiring the down payment as a condition of granting the mortgage loan, the lender is able to reduce the amount of risk he is taking in two ways.

Since the homeowner has some of his own money in the home, the risk of him allowing the mortgage loan to go unpaid is decreased because he too has something to loose if the house is foreclosed on. Secondly, the lender is then only required to loan a mortgage equivalent to 80 percent of the market value of the home, which increases his chance of recovering the money even if the mortgage has to be foreclosed and the house sold off to recover the mortgage loan amount.

However, some mortgage lenders will allow you to take the loan with a smaller down payment if you carry Private Mortgage Insurance.

Mortgage Insurance Protects the Lender If the Buyer Defaults on the Loan

In the event that the mortgage lender has to foreclose on the loan for non payment, the property gets sold and proceeds from the sale go to pay off the mortgage loan. However, if the money made from the sale of the home, after all costs associated with selling it are deducted, is not enough to cover the balance on the loan, then mortgage insurance reimburses the lender for the remaining balance of the loan within the guidelines of the mortgage insurance policy.

Foreclosure is every mortgage loan lender's worse nightmare. The process includes a variety of expenses such as unpaid interest from the time of delinquency through the time of foreclosure, legal expenses, costs to maintain the property, and expenses associated with the sale of the property. The mortgage loan lender usually incurs a loss when a property needs to be foreclosed on.

By requiring that a mortgage loan applicant without a sizeable down payment carries mortgage insurance, the risk of not recovering the mortgage loan is greatly reduced to the lender.

Private Mortgage Insurance Will Only Ensure Low Risk Loans

Because the risk to the mortgage insurance company can also be great, they will not approve all mortgage loans for mortgage insurance.

The mortgage insurance company will need to evaluate the credit risk of the potential mortgage loan borrower as well as the value of the property the mortgage is being taken against. If the borrower seems to be too high of a credit risk or the property does not seem to be worth the value, the Insurance company will refuse to provide mortgage loan insurance.

The mortgage insurance company may also choose to charge higher premiums to insure riskier loans.