What Is Qualified Mortgage Insurance?

Qualified mortgage insurance refers to a type of mortgage protection afforded to lenders. This type of insurance is only available on FHA-sponsored loans. This type of insurance should not be confused with credit insurance, which is a premium paid by the consumer to protect her payments against default in case of disability, unemployment, or death.

History

The Federal Housing Administration instituted qualified mortgage insurance to protect the lenders it sponsored. This insurance is paid by the consumer--usually only when the loan exceeds a certain LTV (loan to value), usually 80%--to protect the lender's loan in case of default or foreclosure. The federal government steps in with payments if a borrower defaults.

Benefits

While qualified mortgage insurance does not really benefit the consumer, it does do a public service: by controlling the mortgage debt in the market by compelling customers to pay premiums on their loans, riskier loans are often avoided (the riskier the loan, the higher the insurance premium).

Time Frame

Qualified mortgage insurance premiums are normally required each month on top of the existing mortgage payment for as long as the borrower stays above the stated loan-to-value threshold. Once the borrower has repaid enough to drop below the threshold set by the government standard (again, usually 80% LTV), insurance premiums are canceled.

Identification

It's important to be able to differentiate between qualified mortgage insurance and credit insurance. Both are normally paid through monthly premiums--on top of the principal and interest mortgage payment--but credit insurance protects the borrower and qualified mortgage insurance protects the lender. When the topic of insurance comes up in a mortgage process, it's essential for the borrower to get a full explanation of the protections being offered on the loan. Credit insurance is beneficial for some borrowers (especially those in dangerous careers), but is not necessary for others.

Theories/Speculation

As mortgages become riskier and riskier, it's possible that qualified mortgage insurance may be mandated for all mortgage products in the future--including those not sponsored by the FHA. This will compel consumers to carefully consider entering into loans.