Details

Created on Monday, 23 January 2012 02:12

Down Payments and Mortgage Insurance Limit Financial Loss to Mortgage Providers

People who are in the mortgage business understand very well that the whole mortgage process is a risky business for mortgage companies.

Giving out a home loan to a borrower does not guarantee the mortgage provider that when the time comes for repayment of the loan, the borrower would be able to settle the debt.

It is this level of risk associated with mortgage loans that have pushed many mortgage providers to demand down payments from borrowers before the mortgage loan is approved.

Typically, most mortgage providers require that borrowers put down between 10% and 20% of the value of the loan before the mortgage will be granted.

Whereas this may cushion the lender should the borrower go on to default in repaying the loan, it is not enough to adequately ensure that the mortgage lender does not lose a lot of money through homeowner delinquency.

Just as we all purchase car insurance in other to gain financial support from the insurance company in the event of an accident, or we purchase life insurance, mortgage companies have also made it a point to purchase insurance over mortgage loans.

This means that when a borrower defaults in mortgage payment, the mortgage company can claim insurance from the mortgage insurance company.

Mortgage companies have combined mortgage insurance terms with lower down payments to ensure that borrowers who do not have enough financial means to meet the demands of higher down payments can still acquire a home loan.

This means that, instead of a borrower having to look for money in order to pay the 20% down payment required on a home loan, the mortgage provider may choose to accept a 10% down payment once an insurance policy is purchased on the mortgage loan.

The duty of purchasing insurance on a mortgage loan lies solely with the borrower. Borrowers who are looking for mortgage insurance may obtain such a service from mortgage banks, commercial banks and any other financial institution.

However, there is a product available in the mortgage market which pays the full mortgage of a deceased borrower. This sort of mortgage insurance is different from the one that will come to the aid of a borrower when he or she defaults in mortgage payments. The former product is known as mortgage life insurance.

It is recommended that borrowers sit down with their insurance agents to assess the advantages and disadvantages of the insurance product they wish to purchase. This will ensure that the borrower is made aware of the limitations and benefits of the product he or she is buying.

These days, the need for borrowers to pay for mortgage insurance is becoming greater. This is because more investors who loan out their monies to mortgage companies are demanding assurance that their investments will be save through out the entire duration of the loan.

Since a borrower’s long term financial conditions cannot be predicted by a mortgage company, mortgage insurance is seen as the viable alternative to ensure that lenders and investors limit their risk.