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For most homebuyers, the biggest hurdle to owning a home is the down payment. Private mortgage insurance, or private MI, can allow you to purchase a home with less down than what otherwise may be required.
Lenders and investors typically require mortgage insurance for loans with down payments of less than 20%. MGIC MI provides lenders a financial guaranty should a loan go into foreclosure. It is this guaranty that allows many lenders not to require a 20% down payment when making home loans.
Here’s how it generally works:
- A borrower buying a $150,000 home makes a 10%, or $15,000, down payment.
- The lender then obtains private MI on the borrower’s $135,000 mortgage, reducing its exposure to loss from $135,000 to $101,250.
- The private MI covers the top portion of the mortgage – usually the top 25% to 30%. In this case, the MI will absorb 25%, or $33,750, of any ultimate loss to the lender.
Information courtesy of MGIC.