Lender mortgage Insurance (LMI)

One of the things lenders do when they consider granting a mortgage loan is assess their risk of non-payment.  For riskier loans, they require the home buyer to pay for additional Lender mortgage Insurance (LMI).  This insurance does nothing at all for the home buyer, except cost them more money!  It is solely for the protection of the lender.

LMI protects lenders against two outcomes.

The first occurs when the borrower defaults on repayment.  The insurance covers shortfalls for the lender; however, even though the lender is collecting on the shortfall, the borrower is still responsible for the debt.

The second occurs when the borrower sells the home for less than the loan amount.  This only happens in markets where home prices have declined significantly, as they have in the United States.  So far Australia has not been impacted.  However, should that happen, the insurance covers the shortfall for the lender.  The borrower, once again, is still responsible for repaying the total amount remaining on the loan.

Generally speaking, prime buyers who borrow 80% of the property price, or less, will not be required to take out an LMI policy.  Prime buyers are those with significant and stable incomes and excellent credit records.  

Unfortunately, the rest of us will have to bear the added cost of LMI.  How much will it cost you?  A good rule of thumb is the riskier the loan, the higher the cost of the LMI.  Some borrowers who show recent or frequent job changes are considered to have unstable sources of income.  This could place them in the subprime mortgage category, which will not only cost them for the LMI but also more for the mortgage itself.  In addition, if they have had credit problems in the past they will probably end up in the land of subprime mortgages as well.

There are three things you can to do to help yourself.  

Fist, if you have the patience, wait till you have held your job long enough for your income to be considered stable.  Consult with several different lending professionals to get an idea how long that might be.

Second, start monitoring your credit rating.  The Internet has many sources where you can get help understanding what is in your credit report and how to begin repairing your credit.

Finally, if you have a solid relationship with a relative who would be considered a prime buyer, you can ask them to co-sign the mortgage with you.  Bear in mind that should you default on the mortgage; your co-signor will be responsible.