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What Is Mortgage Insurance? How It Works, When It’s Required

Mortgage insurance protects the lender. You’ll have to pay for it if you get an FHA mortgage or put down less than 20% on a conventional loan.

Barbara Marquand
Bella Angelos
Chris Jennings
Updated
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Mortgage insurance makes it possible to put down less than 20% to buy a house and still qualify for a home loan.
You pay for the coverage, which compensates the lender if you default on the mortgage. The cost and other details vary by the type of loan.
» MORE: What is PMI?

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How does mortgage insurance work?

Mortgage insurance pays the lender a portion of the principal if you stop making mortgage payments. However, you're still on the hook for the loan, and you could lose the home in foreclosure if you fall too far behind.
This coverage differs from mortgage life insurance, which pays off the remaining mortgage if the borrower dies, or mortgage disability insurance, which pays the mortgage for a certain period if the borrower becomes disabled.

PMI vs. MIP

Here's what you need to know about mortgage insurance for conventional loans, which are not federally guaranteed or insured, and FHA mortgages backed by the Federal Housing Administration.

PMI for conventional mortgages

Many lenders offer conventional mortgages with low-down-payment requirements — some as low as 3%. However, a lender likely will require you to pay for private mortgage insurance, or PMI, if your down payment is less than 20%.
Before buying a home, you can use a PMI calculator to estimate the cost of PMI, which will vary according to the size of your home loan, your credit score and other factors. Typically, the monthly PMI premium is included in your mortgage payment. You can ask to cancel PMI after you have over 20% equity in your home.
» MORE: Calculate your PMI costs

MIP for FHA loans

FHA loans feature minimum down payments as low as 3.5% and have easier credit qualifications than conventional loans. However, most FHA home loans require an upfront and annual mortgage insurance premium, or MIP, regardless of the down payment amount.
The upfront premium is 1.75% of the loan amount and is due when the mortgage closes. You can pay in cash or roll the amount into the loan.
The annual MIP ranges from 0.15% to 0.75% of the average outstanding loan balance and is paid in monthly installments. Most home buyers will pay 0.55%, according to the FHA. How much you put down will determine how long you’ll have to pay MIP.
  • Putting down 10% or more typically means paying MIP for 11 years. 
  • Putting down less than 10% means MIP lasts for the life of the loan.
» MORE: Is an FHA loan right for you?

Fees for USDA and VA loans

While conventional loans often require private mortgage insurance if the down payment is less than 20%, VA and USDA loans do not. Instead, VA loans typically require a one-time funding fee, and USDA loans charge an upfront guarantee fee plus a small annual fee, similar to MIP for FHA loans.

USDA guarantee fee

USDA loans are zero-down-payment loans for rural home buyers. USDA loans issued by lenders have two fees:
  • An upfront guarantee fee: This fee is 1% of the total loan amount and paid when the mortgage closes. The guarantee fee protects the lender if the borrower defaults.
  • An annual fee: This fee is 0.35% of the average outstanding loan balance for the year, which is divided into monthly installments and included in your mortgage payment every year for the life of the loan. The federal government evaluates the fees each fiscal year and can change them. But your fee amount will not fluctuate; it is fixed when the loan closes.
» MORE: Is a USDA loan right for you?

Mortgage loans from our partners

NBKC

on NBKC

NBKC
4.5
NerdWallet rating
Min. credit score

620

Min. down payment

3%

New American Funding

on New American Funding

New American Funding
4.0
NerdWallet rating
Min. credit score

N/A

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0%

GO Mortgage

on GO Mortgage

GO Mortgage
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Min. down payment

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COMPARE MORE LENDERS

VA funding fee

VA mortgages require no down payment and feature low interest rates. Those eligible include:
  • Active, disabled or retired military service members
  • National Guard members and reservists (6 years of service or 90 days of active service)
  • Eligible surviving spouses
These loans don't require mortgage insurance, but most borrowers will pay a funding fee ranging from 1.25% to 3.3% of the loan amount for purchase loans. The fee varies based on your down payment amount and whether this is your first VA loan.
The funding fee for an Interest Rate Reduction Refinance Loan, or IRRRL, is 0.5%, and the fee for a VA cash-out refinance is 2.15% for the first such loan and 3.3% for subsequent loans.
» MORE: Is a VA loan right for you?

How to avoid mortgage insurance

Generally, you'll need to get a conventional mortgage and put at least 20% down to avoid private mortgage insurance. However, that’s not the only path, especially for first-time buyers who may not have that much saved yet.
Some state first-time home buyer programs offer low-down-payment mortgages with no or reduced mortgage insurance requirements. Many of these programs are offered through state housing agencies and include down payment assistance, often structured as a second mortgage with low or deferred payments. This assistance can make homeownership more accessible without a large upfront investment.
But if you don’t qualify for those programs or want more flexibility, another common strategy is using a piggyback mortgage, also known as an 80-10-10 loan. A piggyback mortgage splits the loan into two parts so the primary mortgage stays under the 80% threshold. This allows borrowers to avoid PMI without needing a full 20% down payment.
🤓 Nerdy Tip
If you are considering a piggyback loan, it’s important to keep in mind that these loans tend to have higher interest rates because they are riskier for lenders. You’re essentially trading one cost (PMI) for another (a higher-rate second loan), and in some cases it can end up costing more over time.
For FHA loans, the most common way to remove MIP is by refinancing into a conventional loan once you’ve built enough equity (typically 20%) which can eliminate mortgage insurance altogether.
If that's not possible, then budget in the cost of mortgage insurance or, for eligible borrowers, VA or USDA fees when calculating how much home you can afford.
» MORE FOR CANADIAN READERS: What is mortgage insurance?
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