How Mortgage Insurance Works mgic.com/training mgic.com/contact

A GUIDE FOR LENDERS Contact your MGIC representative, Sign up for our free, online MI Basics class at – – – – RESOURCES information more aboutFor mortgage insurance: What Is Mortgage Insurance?

2 –– It’s a financial guaranty that reduces the loss to the lender or investor in the event the borrowers do not repay their mortgage –– It’s also called MI, private MI or PMI By using MI to reduce risk, the quality of the mortgage as an asset is enhanced. It becomes a safer investment for lenders who keep their loans in portfolio and for investors looking for secure purchases. Even if the borrowers fail to repay, the lender/investor will not suffer a complete loss, but rather, share the loss with the mortgage insurer. 

3 does mihow work? Typically on a 90% LTV, fixed-rate How mortgage, investors require 25% MI coverage. This means that, in the event of a claim, MGIC is responsible Does MI for paying 25% of the outstanding balance, leaving the lender at risk for 67.5% of the original property Work? value. (Original property value is the lesser of the property sales price and For example: the appraised value. For a refinance transaction, original value is the Consider borrowers who appraised value.) purchase a $200,000 property with a fixed-rate mortgage. On an uninsured loan, the lender is at risk for the entire loan balance. They make a 10% down payment and are required to use MI to finance a $180,000 mortgage.

$200,000 Property

Down Payment 10% of Property Value ($20,000)

$180,000 Loan

MGIC MI Coverage 25% of Loan Amount ($45,000)

Lender Exposure 67.5% of Property Value ($135,000)

4 If, down the road, these borrowers fail to repay their mortgage, the lender or investor files a claim based on the unpaid loan balance, delinquent interest and foreclosure costs. There are several settlement options MGIC can elect

. when paying a claim: ––Percentage Option ––Loss on Property Sale Option ––Acquisition Option

mgic.com/loancenter ––Anticipated Loss Option . See MGIC’s Servicing Guide for details. mgic.com/guides . mgic.com ; details at mgic.com/servicing-guide Order MGIC MI online via the Loan Center: Login at RESOURCES See our Underwriting Guide and guideline summaries at RESOURCES Go to MiQ for mortgage insurance rate quotes, mgic.com/MiQ. See MGIC’s Servicing Guide at how does mihow work? 5 5 How Does MI Fit Into the Big Picture?

6 RESOURCES Prepare your borrowers for homeownership with MGIC’s Homebuyer Education, a free online certification program. Register for your Homebuyer Education code at mgic.com/homebuyereducation. For detailed information about cancelling MI, go to mgic.com/servicing/cancelling-mortgage-insurance. lift them over that hurdle. hurdle. that over them lift — to homeownership afford consumers more help to created was MI consumers. many for clear to hurdle adifficult been has payment down 20% that Historically, payment. down 20% a made have borrowers the that meaning 80%, least of at ratio aloan-to-value has mortgage the that is parameter such One purchased. are they before meet must loans that parameters set have Investors mortgages. more originate to funds those use turn in who lenders, from mortgages purchase Mac Freddie and Mae Fannie like Investors  7

how does mi work? Mortgage insurance can come into play during several stages of the mortgage cycle. It’s most commonly ordered during the origination process: ––By the loan originator while taking the loan application ––By the processor while completing the loan file or ––By an investor on warehoused loans Later on in the cycle, MI serves as the passkey for low-down-payment loans for delivery into the Secondary Market, where the funds from their sale become available to fund new mortgages. From origination through Secondary Market delivery, MI helps keep the mortgage cycle rolling along.

8 Increased buying How power. Say your borrowers have saved $20,000. They could Can My use that cash to put 20% down on a $100,000 home OR they could make a Borrowers smaller down payment on a more expensive home — for example, 10% down on a Benefit $200,000 home. Expanded cash-flow From MI? options. Using MI to finance their Borrowers probably do not consider mortgage, your borrowers themselves a potential default risk, could elect to put less so they may be skeptical or reluctant money down and still have about MI. By offering MI as a finance funds for home-related option, you can overcome their doubts purchases and repairs or by showing them the opportunities investments. For example, that financing with MI can create for rather than putting 20% them.  down ($40,000) on a $200,000 home, they may decide to put down 10% ($20,000) and use the other $20,000 to remodel. 

9 canhow borrowers benefit my from mi? Lower monthly Private mortgage insurance may payments. be cancelled. MGIC rewards The Homeowners Protection Act borrowers with credit of 1998 (HPA) provides conditions scores of 760-plus with for homeowners to request MI our lowest borrower- cancellation when their mortgage paid monthly MI rates. balance reaches 80% of the original That translates to property value – because they’ve . monthly MI costs and made all scheduled payments or extra monthly mortgage payments ahead of schedule. payments that are If they don’t request cancellation, significantly less than their lender must automatically cancel FHA financing. the MI policy when their mortgage Secure, competitive, balance reaches 78% of original value, predictable monthly and their mortgage payments are payments. current. . A fixed-rate mortgage Outside of HPA, they can ask their with MI provides lender to cancel MI based on an borrowers with a increase in their property’s appraised value. locked-in monthly mgic.com/servicing/cancelling-mortgage-insurance payment that will not In all scenarios, other requirements increase and that will may apply. Homeowners should ask be reduced when MI their lender for details. coverage is cancelled. Once mortgage insurance is mgic.com/homebuyereducation cancelled, the borrowers’ monthly mortgage payment is reduced by the amount of their monthly MI payment. For detailed information about cancelling MI, go to RESOURCES Prepare your borrowers for homeownership with MGIC’s Homebuyer Education, a free online certificationyour program. Homebuyer Register Education for code at 10 How Do Do How lender orlender investor compliance. for are they as just MI for underwritten are files Loan Qualify for MI? Qualify Borrowers My – – – – insurer’s own automated underwriting system system underwriting automated own insurer’s by the electronically or staff underwriting insurer’s mortgage by the manually underwritten be can Files of it independently or evaluation lender’s the with simultaneously occur can MI for Underwriting

 11

how do mymy membersborrowers qualify qualify for for mi? mi? Generally, the principles of the mortgage industry’s Four Cs apply: The borrowers’ Credit, Capacity, Capital and Collateral are evaluated, as represented by the information on their loan application and on the documentation gathered to measure, support and substantiate their financial standing and the property’s value. . The Four Cs Qualifying With

Credit Quality in Mind The borrowers’ As mortgage professionals, our shared

willingness to repay the mgic.com/loancenter goal is to qualify as many borrowers . loan, based on their as possible without compromising the prior use of credit assets of the lender or the investor Capacity and, above all, without compromising

The borrowers’ ability the borrowers’ ability to successfully mgic.com/guides

to repay, based on the maintain homeownership. mgic.com ; details at amount and stability of By carefully reviewing the borrowers’ income Credit, Capacity, Capital and Collateral, MGIC can piece together a Capital comprehensive picture of risk. The amount of the investment in the The presence of a high-risk factor in property from savings any one of these categories doesn’t and other sources necessarily threaten successful homeownership. But when a number Collateral of interrelated high-risk characteristics Whether the property’s are present without sufficient offsets or value and marketability compensating factors, their cumulative provide adequate effect increases the likelihood of default. security for the loan Order MGIC MI online via the Loan Center: Login at RESOURCES See our Underwriting Guide and guideline summaries at 1212 How Is MI Paid For? MGIC offers both lender-paid and borrower-paid MI premium plans.

Borrower-Paid MI

MGIC borrower-paid premium plans Monthly Premiums incorporate credit scores to tier Borrower-paid monthly MI remains premiums. Under these plans: the mortgage industry’s preferred MI ––Borrowers with better credit product because it’s easy to execute. ratings receive lower MI premium rates MGIC borrower-paid monthly MI ––Those with weaker credit ratings most often works out to be the best receive higher rates option for borrowers with high-quality credit — even over FHA financing.

13 is mihow for? paid Advantages of conventional financing Single Premiums with MGIC monthly borrower-paid Borrowers pay a one-time, single payment up front MI over FHA include: at closing or finance it into the loan amount (check ––No upfront premium investor guidelines). A third party, such as a builder ––Lower loan amount (because or a seller, can also pay Single Premiums. there is no upfront premium to finance) Split Premiums ––A lower monthly mortgage MGIC Split Premiums give your borrowers the payment option of paying part of the MI premium up front ––Greater equity in order to reduce the monthly MI premium paid ––The chance to cancel MI sooner along with their mortgage payment. Borrowers A no-premium-due-at-closing option can choose the upfront premium rate, which is a reduces closing costs. Borrowers pay percentage of the loan amount. the premiums as part of their monthly A third party, such as a builder or a seller, may be mortgage payment. eligible to pay the upfront premium. Monthly premiums are cancellable after an acceptable LTV level has been reached. When they are cancelled, the monthly mortgage payment is reduced by the amount of the MI premium.

MGIC lender-paid MI rate programs provide a “no MI” option for Lender-Paid MI borrowers. Lender-paid premiums are usually built into the mortgage interest rate or the origination fee. For example, in exchange for paying the mortgage insurance premium, the lender may charge the borrowers a mortgage interest rate of 4.5% rather than 4.25%. Or the lender may recoup MI costs by charging an origination fee.

14 to be met. be to need will that criteria other any as well as may use, you plans premium the regarding you guide Your will company on based is of MI cost The of Cost MI The – – – – – – – – – – – – – – – – – – such as a loan for arefinance for aloan as such compensate for additional risk, to premium the to adjustments any are there Whether scores credit borrowers’ The amount Loan investor or lender by the determined as coverage, of MI amount The ratio (LTV) Loan-to-value orrefundable nonrefundable is premium MI the Whether term Loan etc.) adjustable, (fixed, program loan mortgage The plan premium MI The

RESOURCES Go to MiQ for mortgage insurance rate quotes, mgic.com/MiQ. 15

how is mi paid for? Mortgage Guaranty Insurance Corporation MGIC Plaza, Milwaukee, Wisconsin 53202 • mgic.com © 2012-2019 Mortgage Guaranty Insurance Corporation. All rights reserved. 71-42917 6/4/19 for your borrowers and yourself. With MI you can: you MI With yourself. and borrowers your for opportunities create you option, finance mortgage a as it offering and works MI how understanding By Advantage You Extra an GivesMI – – – – – – – – costs, compared to financing with FHA with financing to compared costs, MI in thousands borrowers your save Possibly loans high-LTV safe, Structure differentiate yourself from your competition by: and Advisor Trusted as role your Enhance base customer your Broaden + + + + mortgage payment mortgage monthly their reduce and MI cancel to able may be they when them Notifying borrowers your provide you options the Broadening

RESOURCES For more information about mortgage insurance: ––Contact your MGIC representative, mgic.com/contact ––Sign up for our free, online MI Basics class at mgic.com/training