January 8, 2001, Revised December 6, 2007

Mortgage insurance is not a required early disclosure, so some borrowers can be caught short. Premium rates vary with the same factors that affect default risk that lenders use in pricing loans.

Mortgage Insurance Is Not a Required Early Disclosure

"I was never told that I had to purchase private mortgage insurance until closing, when it was suddenly dumped on me. I was furious. Do I have any recourse?"

Knowledgeable borrowers understand that if they make a down payment less than 20% of the value of the property, they probably will be required to purchase private mortgage insurance, referred to by the industry as "Private MI" or PMI. If they don't know it beforehand, however, they won't discover it from the Truth in Lending statement they receive from the lender because it isn't there. It isn't on the Good Faith Estimate of Closing either unless they elect to pay the insurance premium upfront in cash, which very few do.

Under Federal legislation passed in 2000, lenders are obliged to disclose PMI "at the time the transaction is consummated", which presumably means when the note is signed by both parties. Since the note is signed at closing, that’s too late to do a borrower any good. Most lenders disclose well before then, but yours didn’t and you were caught short.

I'm afraid you have no recourse because the lender gave you all the disclosures that are required early in the process, and PMI is not one of them. If it is any comfort, however, it probably would not have made any difference had you known, for reasons indicated below.

Factors Affecting Mortgage Insurance Premiums

"I recently discovered I was paying a mortgage insurance premium almost twice as large as my neighbors. Is there a good reason for this?"

PMI premiums are expressed as a percent of the loan balance, so in dollars, larger loans carry higher premiums. Traditionally, premium rates varied with the type of loan, down payment and the amount of insurance coverage required by the lender.

Insurance coverage refers to the maximum loss that the insurance will cover. The higher the coverage, the less the risk of loss to the lender or investor. Coverage standards are largely dictated by Fannie Mae and Freddie Mac, the two Federal agencies that buy a large proportion of the loans sold by lenders in the secondary market.

In recent years, PMI companies have expanded their coverage to include mortgages that previously would have been viewed as too risky. They now vary their premiums with the same factors that lenders use in pricing loans, including credit scores, type of property and purpose of loan. See What Market Niche Are You In?

The difference in premium between you and your neighbor could be due to any of these. When these factors are the same, differences in premiums charged by different companies are usually very small.