Private Mortgage Insurance Becoming Mandatory

High risk borrowers are being forced to purchase private insurance from lenders in the United States. This comes after a record number of homes were foreclosed upon.

by James R. Lindamood

The staggering number of mortgage defaults in the last year have caused mortgage lenders to begin holding their borrowers to a higher standard. For this reason, many lenders are requiring that even well-qualified borrowers obtain private mortgage insurance. This type of insurance is typically reserved for those who are unable to afford a twenty percent down payment up front, or are deemed a high risk borrower.

Private mortgage insurance has long been a requirement for those mortgage holders who don't put down a full 20 percent for down payment on their home. PMI is designed to insure the lender, not the borrower. If the borrower defaults on their mortgage, the mortgage insurance company pays the lender. That way, lenders don't lose money by betting on their customer’s ability to pay. PMI companies have, in the past, gone out of their way to do business in the US, since the US market was such a hot commodity. However, the recent plague of foreclosures have tainted the waters.

However, with the US market on the decline, many private mortgage insurance companies have labeled the US as a high risk market, and are starting to raise the bar, making it harder to lenders to get the coverage. For this reason, and because mortgage companies have been burned so badly, many borrowers who were considered well-qualified before, for example those with a high credit score or a large down payment, are being required to obtain PMI.