It's easy to explain mortgage insurance - you just need to remember that mortgage insurance is not insurance for you, the borrower. Mortgage insurance exists to protect the mortgage lender.

If we are to explain mortgage insurance in simple terms, compare it with something a bit more concrete - car insurance, for example, or home insurance. We take out insurance because if something really bad happens, for example our car or our house goes up in flames, we don't want to be left with nothing. At least if we have insurance, then when the worst happens, we get some money to buy another house or another car.

Mortgage insurance manages risk in the same way. Your mortgage isn't going to go up in flames, but it has pretty much the same affect if you declare bankruptcy - the mortgage lender is left with nothing to show for the tens of thousnds, or hundreds of thousands, they advanced you as a loan against your home. A similar problem occurs for the lender if they foreclose your home, and can't sell it for a high enough price to gat back what you owe on the mortgage.

We can explain mortgage insurance, then, as a protection for your mortgage lender, in the same way that home insurance or car insurance is a protection for you.

Expain Mortgage Insurance Requirements

The decision about whether or not to take out mortgage insurance is not generally made by the borrower. Mortgage insurance costs you, often a lot of money, and you get no personal benefit, so you as a borrower have no reason to take out mortgage insurance. Usually, your mortgage lender will decide whether they want you to take out mortgage insurance, and if you don't take it out, they just won't lend to you, so in effect you have no choice but to comply.

Mortgage lenders usually require you to take out mortgage insurance in higher-risk situations. If you are borrowing more than 80% of the value of your property, the risk of getting upside down on your mortgage is higher, so you are more liekyl to be told to take out mortgage insurance.

Likewise, if you have a lower income or a poor credit history, you are likely to be told to take out mortgage insurance.

A mortgage insurer will look at the same factors your mortgage lender considers in deciding whether or not to approve you, and how much to charge you for your mortgage insurance. To explain, mortgage insurance is a form of gambling by the private mortgage insurance companies. They hope that you make all your payments without incident, so they get to keep your payment and never have to pay out a claim to your mortgage lender. Therefore, the mortgage insurer really only wants to insure you if you're going to make every mortgage paymetn for 30 years without a problem.

Explain Mortgage Insurance With FHA

FHA loans are based on mortgage insurance administered by the Federal Housing Administration. For borrowers who can't meet the requirements of private lending companies, FHA-backed loans are government-insured, making lenders willing to issue loans to people who otherwise wouldn't meet their risk guidelines.