This may not make sense, but the guidelines allow it (as of now), and who ever said that these guidelines were logical? The hitch, because of course there is one, is that the interest rate on the second loan will be higher than for the first. And there are usually some additional fees associated with the second. But it is often well worth it, and always worth looking at as a possibility.

Mortgage insurance is a protection for the lender only, but you will have to pay for it in exchange for getting a higher loan from the lender--in other words, putting in less money for the down payment. When there is little equity in the house as security for the lender, there is a good chance that the lender will lose money in the event something happens and you are not able to meet your obligation to pay the mortgage. If the lender loses money, then MI steps in to reimburse the lender.