Putting less than 20% down on your home sounds like a dream…but what’s the catch? You will most likely have to pay mortgage insurance until you reach that 20% threshold. This insurance policy lowers the risk of the lender so that you can qualify for a loan that you might not otherwise be able to get. If you are required to pay mortgage insurance, it may be included in your total monthly payment, in your closing costs, or both. The terms of this policy are dependent on the loan type you are applying for.
Differences in Mortgage Insurance with Loan Type
With a conventional loan, private mortgage insurance (PMI) is implemented through a private company. The premium is typically included in monthly payment with little to no closing costs. Your rates will vary based on the down payment amount and your credit score.
Federal Housing Administration (FHA) Loan Mortgage insurance premium is paid to the Federal Housing Administration (FHA) and is required for all FHA loans. It is included in closing costs and your monthly payment. Your rates are the same regardless of credit score, but there is a slight increase in price with a down payment of less than 5 percent. US Department of Agriculture (USDA) loan This program is similar to the Federal Housing Administration but can be cheaper. The payment is included in closing costs and your monthly payment. Department of Veterans’ Affairs (VA) loan The VA guarantee eliminates a monthly mortgage insurance fee and instead requires an upfront “funding fee”. The amount of the fee depends on criteria based on military service, down payment, and more. With all government loans, you have the ability to roll the upfront or closing cost fee into your total mortgage instead of paying out of pocket. However, this increases both your loan amount and overall costs.