What is Mortgage Insurance?

If you don't have enough money to put a 20 percent down payment on your new home, your mortgage loan will almost always require mortgage insurance. Mortgage insurance helps protect the lender if the buyer fails to repay a loan. Loans that are insured by the government or private mortgage insurer enable the homebuyer to purchase a home with a lower down payment than would otherwise be acceptable to the lender. Mortgage insurance on government loans is known as Mortgage Insurance Premium (MIP); the term Private Mortgage Insurance (PMI) is used for all other types of loans.

So, with PMI, lenders generally reduce the down payment requirements from 20 percent of the purchase price to as low as 3.5 percent. For example, on a $100,000 home, instead of putting down $20,000, you might be able to make a down payment as low as $3,500. The PMI cost will be added to your monthly mortgage payments and your closing costs.

Loans That Require Mortgage Insurance

Mortgage insurance is also available through three federal government programs: the Federal Housing Administration (FHA) mortgage insurance program operated by the U.S. Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA) loan guarantee program, and the Rural Housing Service (RHS) loan program. To obtain one of these loans you need to apply for a loan through a lender that is approved to do them.

FHA Loans

With FHA insurance, you can purchase a home with a very low down payment (from 3.5 percent to 5 percent of the FHA appraised value or the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given region. To learn more visit www.hud.gov/buying/loans.cfm.

VA Loans

The VA guarantee allows qualified veterans to buy homes with low or no down payment and with less strict guidelines than FHA or conventional loans. If you are a qualified veteran, this can be an attractive mortgage program. To determine whether you are eligible, check with your nearest VA regional office. To learn more visit www.homeloans.va.gov/veteran.htm.

Rural Housing Service (RHS) Loans

The Rural Housing Service, formerly known as the Farmers Home Administration and a branch of the U.S. Department of Agriculture, offers low interest rate homeownership loans with no down payments to low and moderate income potential homebuyers living in rural areas. Check with your local RHS office or a local lender for eligibility requirements. to learn more visit www.rurdev.usda.gov/rhs/common/indiv_intro.htm.

Teacher/Officer Next Door Programs

HUD operates teachers and law enforcement officers housing programs where these community servants can purchase HUD housing at a reduced cost. There are strict residency requirements for this program. To learn more visit for teachers and officers visit http://www.hud.gov/offices/hsg/sfh/reo/goodn/gnndabot.cfm.

State and Local Loan Programs

A number of states sponsor programs to help first time homebuyers qualify for mortgages. Local housing agencies also offer attractive loan terms to eligible homebuyers in some areas. These loan terms often include low down payments or low interest rates to first time homebuyers that meet specified income guidelines. Check with your state or local housing agency. The phone numbers usually can be found in the government "blue pages" of the phone book.