When it comes to getting a mortgage, there are a lot of things to consider. One of those is how much of a down payment should be offered, or how much of one is actually needed. Fortunately for buyers who have not saved up a lot of money, there are some options for lower down payments. These generally include LMI, or Lender's Mortgage Insurance. This helps reduce the risk for the lender and protect their interest in the property when they loan money to the buyer. But what kinds of things should buyers know about LMI? Here are some of the biggest considerations all buyers want to look at where LMI is concerned.
What Percentage of a Down Payment Requires LMI?
As a general rule, any mortgage where the buyer offers less than 20 percent of the purchase price as a down payment will have some form of LMI attached to it. However, that is up to the lender, and there is no reason the lender has to require LMI insurance if they choose not to ask for it. Most lender will require it for lower down payment loans, because without it they are greatly raising their risk of financial loss. Not a lot of buyers default on their mortgages, but lenders know that those with a lower down payment are generally at higher risk of that. Hence the reason for LMI.
Lenders Need Financial Protection, Too
Just like buyers have insurance on their homes in order to protect them from financial hardship if something goes wrong, lenders have LMI in order to make sure they do not sustain large financial losses if there is a loss on the home. With 20 percent of the purchase price as a down payment the lender does not have as much risk, so they will not ask the buyer to also pay LMI. When calculating the amount of the payment, the buyer should make sure they include LMI so they understand how much their total monthly mortgage payment will actually be.
How Do Lenders Determine the LMI Cost?
The cost of LMI will be different from one buyer to the next. That is because the lender looks at a number of factors to determine how much of a risk that buyer actually is. Buyers who are lower risk due to their credit profiles and other areas a lender considers will have a lower LMI payment. Higher risk buyers who can still qualify for a loan will pay larger LMI payments. That means their total mortgage payments will be higher than lower risk buyers, all other things being equal. Lenders will explain that to a buyer who asks, and it is important that every buyer ask questions.
There Are Different Ways to Pay LMI
Generally, there are two different ways that a Canals buyer can pay LMI. One of those ways is through adding it to their monthly payment. That is the most common way the insurance is paid, and also the way most lenders prefer. But there is a second way to pay the LMI, and that is through a large, one-time payment at the time of closing. Not all buyers will have the money to do this, and most lenders will not insist on it, but there are some cases where paying it, or at least part of it, at the closing table is required. Buyers should always ask their lender, so they are not surprised by the amount they need to bring to closing.