Private Mortgage Insurance & Foreclosure
Those facing foreclosure on their homes should keep in mind that a foreclosure hurts not only the debtor, who loses the property, but also the lender and the economy as a whole. Private mortgage insurance helps to insure a lender against a borrower's default.
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Definition
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Private mortgage insurance is a form of coverage that makes mortgage payments for you if, because of financial hardship, you can no longer make them yourself. The policy doesn't pay the funds to you -- it gives them directly to the lender instead, for each month that you do not make your payments. This way, if your financial situation is unchanged, there is a simple provision for keeping your mortgage payments active. The insurance is known as private insurance because it is offered by private insurers instead of government organizations.
Preventing Foreclosure
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A private mortgage insurance policy does not automatically prevent a foreclosure. Actually, most policies only become active after the lender has filed for a foreclosure. If you have mortgage insurance, it will probably not help you avoid the problems associated with defaulting on a loan. Some types of mortgage insurance will pay your previous debts, bringing your mortgage up to the present month and allowing you to resume making payments. If the lender has not fully completed the foreclosure process, this could save your home, but the best way to avoid foreclosure is to make reliable payments, not depend on insurance.
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Requirements
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Mortgage insurance is often an added fee on top of each monthly payment, such as an extra $50 payment. Mortgage insurance is most often required when the borrower does not have a sufficient down payment. Some insurers also may require private mortgage insurance for a large loan or a loan to a borrower with a lower income or bad credit rating. Once their credit improves or they have enough equity in their homes, these borrowers may be able to refinance with a mortgage that does not have insurance. Government mortgage insurance is required for government-subsidized loans, such as those created by the Federal Housing Administration.
Down Payments
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Down payments are one of the most frequent determiners of private mortgage insurance. The down payment is the portion of the loan the borrower agrees to pay when buying the house. The higher the down payment, the more willing the lender is to lend a large sum of money at a good rate. A down payment that is 20 percent of a house's price is a good option and probably will not make mortgage insurance a requirement. Borrowers who cannot afford 20 percent, may need to pay extra for mortgage insurance if they want the same loan.
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