If you have found your dream home, and you are not paying cash, you will need to apply for a mortgage and be approved. Knowing which type of loan works best for you and what payments are needed will help you narrow things down. It is compulsory for mortgage holders to purchase mortgage insurance, however there are still many people paying way more than they should be paying.
What is mortgage insurance?
Mortgage insurance is a policy that protects the lender of the mortgage in the event that the person borrowing may die, default on payments, or are not able to meet the mortgage contract payments. The borrower makes a down payment of the purchase price of the home and will need to pay for the mortgage insurance. If you fall behind on payments this will affect your credit score. You will pay your mortgage insurance in a monthly payment to the lender. There are many types of mortgage insurance these include:
- Private mortgage insurance
- Qualified mortgage insurance premium
- Mortgage title insurance
Private mortgage insurance
This type of insurance means the person borrowing might have to buy as a condition of a conventional mortgage loan. This policy protects the lender and not the borrower. It is arranged by the lender and provided by private insurance companies. It is usually required if the person borrowing gets a conventional loan with a down payment of less than 20%.
Qualified mortgage insurance premium
This type of insurance is paid by the homeowner who takes out a federal housing administration loan. Anyone who has an FHA must buy this type of insurance regardless of the size of their down payment.
Mortgage title insurance
This type of insurance protects against any loss in the event a sale is later invalidated due to an issue with the title. The beneficiary is protected in the event of any losses if it is determined at the time of the sale that someone other than the seller owns the property.
In getting mortgage insurance approved your credit score plays a massive part. To qualify for a mortgage with a low-interest rate your credit score must be in the lower range. If you are ranking in the subprime, it will be become more difficult to be approved as you will have a much higher rate.
Income and debt
The lender will consider your income to debt ratio. Most lenders will use the qualifying ratio 28/36. It typically ranges at 28% which is the amount of your pre-tax gross income of monthly allowance for housing expenses like homeowners and interest payments insurance. 36% is how much is represented of income and that goes towards your expenses in the home and bills, and much more.
A steady income is required by the lender to qualify for a mortgage. Your monthly income can come from other sources such as child benefits, etc. If you are self-employed it can be harder to get approved for mortgage insurance more so than a regular income.