What Is Mortgage Default Insurance?

Despite its name, mortgage default insurance is not insurance for the homeowner.

If a borrower stops making mortgage payments and the lender experiences a loss, the insurance helps protect the lender.

For the buyer, the benefit is that lenders may be willing to approve a mortgage with a smaller down payment because the loan is insured.

For an eligible home purchase, mortgage default insurance is generally required when the buyer has a down payment of less than 20% of the purchase price.

This is often referred to as an insured mortgage. A mortgage with a down payment of 20% or more is generally considered conventional and typically does not require mortgage default insurance.

Mortgage default insurance also has eligibility rules. For example, homes priced at $1.5 million or more are not eligible for an insured mortgage, which means a down payment of at least 20% is required.

The insurance premium is calculated as a percentage of the mortgage amount. Generally, the smaller the down payment, the higher the premium percentage.

Most buyers do not pay the entire premium out of pocket. Instead, it is commonly added to the mortgage balance and repaid along with the mortgage.

This increases the total amount borrowed, but it can also allow a buyer to purchase sooner rather than spending several more years saving a 20% down payment.

Because the premium increases the amount borrowed, it can also affect your monthly mortgage payment. You can compare different mortgage amounts using the Mortgage Payment Calculator.