How Lenders Use Insurance To Protect Against Mortgage Loss

Indemnity insurance for mortgage

When a lender agrees to underwrite a homebuyer’s mortgage, the bank is taking on a fair amount of risk. It is making the assumption that the buyer will make regular payments on his mortgage for 15 to 30 years or more. Indemnity insurance for mortgage protects those lenders from the unforeseen.

In most cases, a mortgage borrower defaults on his loan because of an overall loss of income or he simply passes away. Without indemnity insurance, the lender would be stuck with the property until it was able to sell it,usually at a loss.

Who Pays for Indemnity Insurance?

One would assume that the lender would pay the premiums on an indemnity policy, but the opposite is true. The lender passes the premium on to the borrower. The borrower typically agrees to make the payment because it allows for a lower down payment. The payment is usually tacked onto the monthly mortgage payment, along with property taxes.

When a borrower’s loan carries a high loan-to-value ratio, typically over 75 percent, the lender will require the borrower to carry indemnity insurance on the property. Once the low-to-value ratio hits the right point, most lenders will drop the policy and the borrower will no longer have to pay.