How mortgage insurance works

How mortgage

insurance works

A guide for lenders

How does MI work?

Typically on a 90% LTV, fixed-rate mortgage,

investors require 25% MI coverage. This means

that, in the event of a claim, MGIC is responsible

for paying 25% of the outstanding balance,

leaving the lender at risk for 67.5% of the original

property value. (Original property value is

the lesser of the property sales price and the

appraised value. For a refinance transaction,

original value is the appraised value.)

On an uninsured loan, the lender is at risk for the

entire loan balance.

For example:

Consider borrowers who purchase a $400,000

property with a fixed-rate mortgage.

They make a 10% down payment and are

required to use MI to finance a $360,000

mortgage.

If, down the road, these borrowers fail to repay

their mortgage, the lender or investor files

a claim based on the unpaid loan balance,

delinquent interest and foreclosure costs. There

are several settlement options MGIC can elect

when paying a claim:

• Percentage Option

• Loss on Property Sale Option

• Acquisition Option

• Anticipated Loss Option

See MGIC’s Servicing Guide for details.

What is mortgage insurance?

Mortgage insurance is a financial guaranty that

reduces the loss to the lender or investor in the

event the borrowers do not repay their mortgage.

It’s also called MI, private MI or PMI.

By using MI to reduce risk, the quality of the mortgage as an asset is

enhanced. It becomes a safer investment for lenders who keep their loans in

portfolio and for investors looking for secure purchases. Even if the borrowers

fail to repay, the lender/investor will not suffer a complete loss, but rather,

share the loss with the mortgage insurer.

Resources

Go to MiQ for mortgage insurance rate quotes, mgic.com/MiQ.

See MGIC’s Servicing Guide at mgic.com/servicing-guide.

Down Payment

$40,000

10% property value

Lender Exposure

$270,000

67.5% of property value

MGIC MI Coverage

$90,000

25% of loan amount

$360,000 Loan

$400,000 Property

How does MI fit into the

big picture?

Historically, a 20% down payment

has been a difficult hurdle to clear

for many consumers. MI was created

to help more consumers afford

homeownership—to lift them over

that hurdle.

Investors like Fannie Mae and Freddie Mac purchase

mortgages from lenders, who in turn use those funds to

originate more mortgages.

Investors have set parameters that loans must meet

before they are purchased. One such parameter is that

the mortgage has a loan-to-value ratio of at least 80%,

meaning that the borrowers have made a 20% down

payment.

Mortgage insurance can come into play during several

stages of the mortgage cycle. It’s most commonly ordered

during the origination process:

• By the loan originator while taking the loan

application

• By the processor while completing the loan file, or

• By an investor on warehoused loans

Later on in the cycle, MI serves as the passkey for low-

down-payment loans for delivery into the secondary

market, where the funds from their sale become available

to fund new mortgages.

From origination through secondary market delivery, MI

helps keep the mortgage cycle rolling along.

Resources

Help educate your borrowers on MI and all steps of the

mortgage process by sending them to readynest.com,

MGIC’s consumer education site.

For detailed information about cancelling MI, go to

mgic.com/servicing/cancelling-mortgage-insurance.

How can my borrowers benefit from MI?

Borrowers probably do not consider themselves a potential default risk, so they may be

skeptical or reluctant about MI. By offering MI as a finance option, you can overcome their

doubts by showing them the opportunities that financing with MI can create for them.

Increased buying power.

Say your borrowers have saved

$40,000. They could use that cash to

put 20% down on a $200,000 home

OR they could make a smaller down

payment on a more expensive home—

for example, 10% down on a $400,000

home.

Expanded cash flow options.

Using MI to finance their mortgage,

your borrowers could elect to put less

money down and still have funds for

home-related purchases and repairs

or investments. For example, rather

than putting 20% down ($80,000) on

a $400,000 home, they may decide to

put down 10% ($40,000) and use the

other $40,000 to remodel.

Lower monthly payments.

Borrowers with higher credit scores

typically pay less for MGIC borrower-

paid monthly MI on a conventional

loan than for FHA mortgage insurance.

A lower monthly MI premium usually

translates to a lower monthly

mortgage payment—one that will be

reduced further when the MGIC MI is

cancelled.

Secure, competitive,

predictable monthly payments.

A fixed-rate mortgage with MI

provides borrowers with a locked-

in monthly payment that will not

increase and that will be reduced

when MI coverage is cancelled.

Private mortgage insurance

may be cancelled.

The Homeowners Protection Act

of 1998 (HPA) provides conditions

for homeowners to request MI

cancellation when their mortgage

balance reaches 80% of the original

property value—because they’ve

made all scheduled payments or extra

payments ahead of schedule.

If they don’t request cancellation, their

lender must automatically cancel the

MI policy when their mortgage balance

reaches 78% of original value, and their

mortgage payments are current.

Outside of HPA, they can ask their

lender to cancel MI based on an

increase in their property’s appraised

value.

In all scenarios, other requirements

may apply. Homeowners should ask

their lender for details.

Once mortgage insurance is cancelled,

the borrowers’ monthly mortgage

payment is reduced by the amount of

their monthly MI payment.

How do my borrowers

qualify for MI?

Generally, the principles of the mortgage industry’s Four Cs apply: The borrowers’ credit,

capacity, capital and collateral are evaluated, as represented by the information on their loan

application and on the documentation gathered to measure, support and substantiate their

financial standing and the property’s value.

Loan files are underwritten for MI just as they are for

lender or investor compliance.

• Underwriting for MI can occur simultaneously with

the lender’s evaluation or independently of it

• Files can be underwritten manually by the mortgage

insurer’s underwriting staff or electronically by the

insurer’s own automated underwriting system

Capacity

The borrowers’

ability to repay,

based on the

amount and

stability of income

Credit

The borrowers’

willingness to

repay the loan,

based on their

prior use of credit

Capital

The amount of

the investment

in the property

from savings and

other sources

Collateral

Whether the

property’s value

and marketability

provide adequate

security for the

loan

Resources

See our Underwriting Guide

and guideline summaries at

mgic.com/guides.

Order MGIC MI online via

the Loan Center: Log in

at mgic.com; details at

mgic.com/loancenter.

Qualifying with quality in mind

As mortgage professionals, our shared goal is to qualify as many borrowers as possible

without compromising the assets of the lender or the investor and, above all, without

compromising the borrowers’ ability to successfully maintain homeownership.

By carefully reviewing the borrowers’ credit, capacity, capital and collateral, MGIC can

piece together a comprehensive picture of risk.

The presence of a high-risk factor in any one of these categories doesn’t necessarily

threaten successful homeownership. But when a number of interrelated high-risk

characteristics are present without sufficient offsets or compensating factors, their

cumulative effect increases the likelihood of default.

41 2 3

The cost of MI

Some of the factors that influence the cost of MI include:

• The MI premium plan

• The mortgage loan program (fixed, adjustable, etc.)

• Loan term

• Whether the MI premium is refundable or

non-refundable

• Loan-to-value (LTV) ratio

• The amount of MI coverage, as determined by the

lender or investor

• Loan amount

• The borrowers’ credit scores

• Whether there are any adjustments to the premium

to compensate for additional risk, such as a loan for

a refinance

Your company will guide you regarding the premium plans

you may use, as well as any other criteria that will need to

be met.

Lender-paid MI

MGIC lender-paid MI rate programs provide a “no MI”

option for borrowers.

Lender-paid premiums are usually built into the mortgage

interest rate or the origination fee.

For example, in exchange for paying the mortgage

insurance premium, the lender may charge the borrowers

a mortgage interest rate of 4.5% rather than 4.25%. Or the

lender may recoup MI costs by charging an origination fee.

Resources

Go to MiQ for mortgage insurance rate quotes,

mgic.com/MiQ.

Borrower-paid MI

MONTHLY PREMIUMS

Borrower-paid monthly MI remains the mortgage

industry’s preferred MI product because it’s easy to

execute.

MGIC borrower-paid monthly MI most often works out to

be the best option for borrowers with high-quality credit

— even over FHA financing.

Advantages of conventional financing with MGIC monthly

borrower-paid MI over FHA include:

• No upfront premium

• Lower loan amount (because there is no upfront

premium to finance)

• A lower monthly mortgage payment

• Greater equity

• The chance to cancel MI sooner

A no-premium-due-at-closing option reduces closing

costs. Borrowers pay the premiums as part of their

monthly mortgage payment.

Monthly premiums are cancellable after an acceptable

LTV level has been reached. When they are cancelled, the

monthly mortgage payment is reduced by the amount of

the MI premium.

SINGLE PREMIUMS

Borrowers pay a one-time, single payment up front at

closing or finance it into the loan amount (check investor

guidelines). A third party, such as a builder or a seller, can

also pay single premiums.

CHOICE MONTHLY

MGIC Choice Monthly MI lets lenders customize the

borrower’s monthly payment by choosing an amount to pay

up front, which lowers their monthly payments. Borrowers

have the option to pay the upfront amount out of pocket or

finance it into the loan (within eligibility requirements) – or

use lender credits, seller concessions, or gift funds.

How is MI paid for?

MGIC offers both borrower-paid and lender-paid MI premium plans.

MI gives you an extra

advantage

By understanding how MI works and offering it as a

mortgage finance option, you create opportunities

for your borrowers and yourself.

With MI you can:

• Structure safe, high-LTV loans

• Possibly save your borrowers thousands in MI costs, compared to

financing with FHA

• Broaden your customer base

• Enhance your role as a trusted advisor and differentiate yourself from

your competition by:

– Broadening the options you provide your borrowers

– Notifying your borrowers when they may be able to cancel MI and

reduce their monthly mortgage payment

Resources

For more information about mortgage insurance:

• Contact your MGIC representative, mgic.com/contact

• Sign up for our free, online MI Basics class at mgic.com/training

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insurance corporation

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Milwaukee, WI 53202

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