The general idea behind insurance of any kind goes something like this: You pay money in exchange for a promise for money if something happens. Mortgage insurance is no different — except, in the case of mortgage insurance, you are not the one who actually gets the money if something happens.

The idea behind mortgage insurance is relatively simple: an insurance entity agrees to insure against default on a loan in exchange for premium payments made by you. So – you pay the premiums and should you default, the insurance company will actually pay your lender.

Usually this is the point where people ask “do I have to pay mortgage insurance?” and the answer is — no, not if you put enough money down and pick the right loan program.

On conventional loans, the insuring entity is usually a “private” mortgage insurance company and on FHA or government loans, the insurance company is FHA. Regardless of who you make your mortgage insurance payments to, do not be confused and think you are making mortgage insurance payments to your lender – you are not. The entity that you are making your mortgage insurance payments to is an insurance company (or the government) and is not a lender.

Conventional loans use Private Mortgage Insurance – also known as PMI

When you buy a property using conventional financing, you will be required to put down a 20% down payment or purchase private mortgage insurance. When you have mortgage insurance on conventional loans, you can usually get your lender to drop your private mortgage insurance once you reach a 20% equity point in your property – and conventional loans allow for property appreciation when making the calculation.

If you think that you have 20% equity in your property and want to stop paying monthly private mortgage insurance, the first step is to contact your lender. Each lender has different procedures in place, but normally you can expect to get an appraisal done on the property and have some kind of form to fill out and submit to the lender. Specific questions about the process should be directed to your current lender because each lender is slightly different in their requirements for dropping PMI.

Lender Paid Mortgage Insurance

For conventional loans, there is also something called LPMI – which is short for Lender Paid Mortgage Insurance. The way that Lender Paid Mortgage Insurance works is that the lender agrees to pay the Private Mortgage Insurance in exchange for a slightly higher interest rate. LPMI programs were very popular a couple of years ago, now they are fairly rare to find.

FHA loans use Mortgage Insurance underwritten by the Federal Housing Administration

The way that mortgage insurance works for FHA loans is really in two parts: 1. Up Front Mortgage Insurance Premium (also known as UFMIP) and then Monthly Mortgage Insurance (also known as MMI or MI). Up front mortgage insurance premium is usually 1.5% – 3% of your loan amount (depending on which FHA program you are participating in) and is required to be paid up front, although it can be financed into the loan. The Up front mortgage insurance premium is amortized over a period of 5 years and should you refinance into a new FHA program during those 5 years, FHA will allow you to use whatever is left in your UFMIP account as a credit towards setting up a new loan.

FHA monthly mortgage insurance is figured at a factor of .55% of your loan amount paid monthly. So for a $100,000 FHA loan, the annual monthly mortgage insurance due would be $550 and it would be paid monthly – or about $46 per month. FHA monthly mortgage insurance must be paid until you have paid down the loan to 80% of what was originally borrowed – it does not factor in property appreciation at all. So if you borrowed $100,000 originally, you would be required to pay monthly mortgage insurance until you reached a loan amount of $80,000.

Popular Loan Programs That Don’t Require Mortgage Insurance

Not all loan programs require mortgage insurance – some of the popular loan programs that do not require any mortgage insurance include:

• VA loans
• USDA loans
• Home Path loans

Is mortgage insurance a bad thing? Not really. When you purchase mortgage insurance, you can actually buy more home than you otherwise would be able to afford – because it increases your buying power. First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

Many seniors are looking into getting a reverse mortgage and are finding out that the only type of reverse mortgage that is available today is the FHA HECM (which stands for the Home Equity Conversion Mortgage) or as more commonly called – the FHA Reverse Mortgage.

If you are a senior who is considering a reverse mortgage, be sure that you ask about the potential risk of becoming ineligible for Medicaid as a result of selecting the wrong payout option for your reverse mortgage. This risk of becoming ineligible for Medicaid is something that many seniors are unaware of (and loan officers too!) and it could potentially have devastating consequences.

Unofficially, the term you want to ask them about is something called “Loss of Medicaid Eligibility”.

If you ask your loan officer about it and he doesn’t know what you are talking about, you might want to consider finding another loan officer. It is that important.

Loss of Medicaid Eligibility: What Is It?

With a reverse mortgage there are several different ways that you can access the equity in your house. You can choose to get a lump sum, monthly disbursements or a line of credit. Some of the types of payouts increase the risk of you losing your Medicaid Eligibility, and one does not.

The essence of a LOME risk is that a reverse mortgage borrower could pile up cash in an account and deny themselves the significant health benefits that medicaid could provide. Medicaid is a federal-state health care program for the poor. To qualify for Medicaid, a senior must show monetary evidence of poverty. Although the program varies from state to state, a federal “means test” says that you can have no more than a few thousand (the number changes regularly) dollars in liquid assets.

Which means if you took out a reverse mortgage, chose the wrong payout program and later become ill and needed long term care, you may be denied Medicaid coverage based on your liquid assets.

Loss of Medicaid Eligibility: A General Rule of Thumb

Generally speaking, all reverse mortgage payout options except for the line of credit option carry significant LOME risks because they could lead to risky accumulation of countable assets.

Does this mean that you should always choose the line of credit payout option when getting a reverse mortgage? I was taught long ago to try to avoid using always and never, but I can say this…

Be sure to do your homework about your options – and what possible implications your payout choices may have. I can think of few things as devastating as losing assets as a result of an uninformed decision that could have been avoided just by being aware of other options that were available. Be sure to speak with a reverse mortgage expert before you finalize your reverse mortgage, it could potentially save you hundreds of thousands of dollars.

One of the best ways to get a deal on a house today is to buy a house from a lender who currently owns the house. The lender owns plenty of houses and is usually willing to “cut you a great deal” on price if you will just buy it.

One of the largest lenders in the US (THE largest lender) is Fannie Mae – they own millions of mortgages and currently have thousands and thousands of homes that they own that have been foreclosed properties and went back to the lender.

In an effort to reduce the amount of foreclosed properties that they own, Fannie Mae will not only cut you a great deal on price when buying one of their homes, they will also give you a great deal on the financing of the house.

The new financing program for homes that are owned by Fannie Mae is called the Fannie Mae HomePath program and it is only available for people who are buying a home that is currently owned by Fannie Mae. As with any subset of properties, Fannie Mae owns many homes that are immaculate and move-in ready and they also own quite a few homes that are in need of “a little work” before they can be lived in.

The Fannie Mae HomePath program is designed for homes that are currently owned by Fannie Mae and are move-in ready. The Fannie Mae HomePath Renovation loan program is designed for homes that are currently owned by Fannie Mae and in need of repair.

Fannie Mae HomePath Mortgage
The Fannie Mae HomePath mortgage loan is designed for people who are planning on making the property their primary residence and want to buy a home that is owned by Fannie Mae and found on the HomePath website.

HomePath mortgage loan benefits include:

• Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only)
• You may qualify even if your credit is less than perfect
• Available to both owner occupiers and investors
• Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer
• No mortgage insurance
• No appraisal fees
• No declining markets policy (this is big in the “sun states” AZ, CA, NV, FL)
• No more than 10 financed properties
• No prepayment penalties

Fannie Mae HomePath Renovation Mortgage
For those homes that are in need of a few repairs, Fannie Mae has the HomePath renovation mortgage.

HomePath renovation mortgages have these benefits:

• Financing to fund both your purchase and light renovation
• Low down payment and flexible mortgage terms (fixed-rate or adjustable-rate)
• Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit, state or local government, or employer
• No mortgage insurance

If you are considering buying a home that is currently owned by Fannie Mae, be sure to look into the HomePath mortgage financing program. In an effort to lower the inventory of houses they currently own, some of the best deals in a long time can now be had — whether the home is move-in ready or is in need of “just a little work”!