YOU ASK:

Does mortgage insurance kick in when a mortgage goes into foreclosure?

WE ANSWER:

Yes, the mortgage insurance kicks in, in the sense that it covers the rest of the loan at the time of the foreclosure.

What happens is that mortgage insurance will be the one who will take up the remaining balance of a mortgage in the event that you (as the borrower) are unable to continue with the payment. When the bank forecloses on the property, it will claim for the remaining balance that the borrower was unable to pay.

However, you must remember that this protection is for the interest of the lender and not the borrower. This means that the money is paid to the lender. The payment is also not credited to you, so that you can still lose your house, but from the viewpoint of the lender, their investment on the loan was protected and they were able to recover it.

If this is the case, you may wonder why you need to buy it, when you are not the one that's protected even if you're the one paying for the premiums. Well, mortgage insurance enables you to buy a home for less than 20% down payment. The lender will not grant you your loan unless you get mortgage insurance coverage.

Those who can't afford a down payment of 20% on their home or who still have not obtained 20% equity on their home are considered higher credit risks. This is because you can more easily forfeit on a loan when you have just paid a small percentage of the total value. You can more easily walk away from a $2,000 payment, than for a $40,000 payment.

Your lender is legally obliged (under the Homeowner's Protection Act of 1998) to cancel the private mortgage insurance on your mortgage as soon as your mortgage balance has reached 78% of the appraisal value or of the purchase price, whichever is lower.

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