A "c onventional" mortgage loan is:neither guaranteed or insured by the Government
either "insured" or "non-insured" by private mortgage insurance (PMI)
Insured Versus Non-Insured
Whether a loan is "insured" or "uninsured" depends on the Loan-to-Value Ratio.
- The L-T-V Ratio expresses the relationship between the amount of a loan and the appraised value -or- sale price, whichever is lower. (Formula: Loan Amount/Value = LTV)
A "noninsured" mortgage
is a loan secured by real estate either purchased or financed with at least a 20% downpayment (equity). If less than 20% is put down on a purchase or the loan ratio is over 80%, the loan must be "insured".
An "insured" conventional loan is:
- over 80% loan-to-value and can be up to 95%
- "insured" by a private mortgage insurance company with the premiums paid by the borrower to protect the lender or subsequent secondary market investors in the event of default
- premium is paid in advance and in monthly payments
- similar to and serves same purpose as FHA insurance and VA guarantee
- originated by a private lender
When a loan is partially repaid, the borrower may request that the insurance coverage be terminated by providing the lender an appraisal.