The 80/20 Rule - An Intro to Mortgage Insurance

Many homebuyers know what homeowner’s insurance is and how it works. Yet, mortgage insurance is another type of insurance that is not as well-known as homeowner’s insurance. If you decide to finance the purchase of a home but cannot put down 20% of the home’s purchase price, a mortgage company may require you to have mortgage insurance. Lenders use mortgage insurance to offset risks and protect themselves from a loan default. The 80/20 rule is important to understand as you purchase a home.

What is the 80/20 Rule?

In most cases, you need to make a down payment when you need to finance a home purchase. The traditional down payment target is 20% of the home’s purchase price, and the lender will provide you with a loan for the remaining 80% of the home’s purchase price. According to the 80/20 rule, you can avoid paying mortgage insurance if you have a minimum 20% down payment. Unfortunately, you may not be able to afford to make a 20% down payment. In this case, the lender will require you to get mortgage insurance.

How does it work?

Mortgage insurance financially protects the lender if you default on your home loan. Yet, you are the one who pays the premium on the insurance. If you cannot make your mortgage payments, the insurance will pay the lender a percentage of the principal amount on the mortgage. Yet, you are still responsible for paying the mortgage. If you do not work with the lender to restart making mortgage payments, you can lose your home when the lender starts the foreclosure process. Therefore, mortgage insurance is an expense you must pay even though you do not get any benefits.

Mortgage Insurance for Conventional and Government-Backed Mortgages

There are different types of home loans, and they each treat mortgage insurance differently. Here is what you need to know about how mortgage insurance works with different types of mortgages:

• Conventional – You can get a conventional mortgage as low as a 3% down payment. A conventional mortgage lender will require you to have private mortgage insurance if your down payment is less than 20%. Yet, you may be able to avoid having mortgage insurance if your down payment is more than 20%.
• FHA – You can get an FHA mortgage for as low as a 3.5% down payment. The credit requirements for this type of mortgage are less strict than a conventional mortgage. Yet, you will need to pay for mortgage insurance regardless of how much you put down. You will pay an upfront premium and an annual premium in monthly installments.
• USDA – You can get this loan if you purchase a home in a rural area. There is no down payment requirement, but there is an up-front fee and an annual fee that you pay for the life of the mortgage. There is no mortgage insurance requirement.
• VA – This mortgage is for active, disabled, or retired military members. It also does not have a mortgage insurance requirement, but there is a funding fee.


When looking for homes for sale in Dallas, be sure you understand the mortgage insurance requirements for your mortgage.