FHA-insured mortgages and mortgage insurance requirements can be confusing, but the facts are simple. FHA home loans aren't any more difficult to understand than a conventional loan. You just need to learn the lending vocabulary.
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Mortgage Insurance Requirements for FHA Loans
FHA-insured mortgages and mortgage insurance requirements can be confusing, but the facts are simple. FHA home loans aren't any more difficult to understand than a conventional loan. You just need to learn the "lending vocabulary." The first thing to know about an FHA home loan, FHA refinance loan or FHA guaranteed cash-out refinancing loan is the nature of the FHA itself.
DOES THE FHA ISSUE ME A LOAN?
The FHA guarantees your loan but doesn't actually lend out the money. The FHA's job is to pay back the loan should you go into default or foreclosure. The bank still gets paid, reducing the risk for your lender. This makes your loan application much more attractive. The reason for confusion over who lends the money often comes in part because of industry terminology--FHA guaranteed mortgages are often called "FHA loans" for short.
HOW DOES THE FHA WORK WITH MY LENDER?
The FHA promises the bank that it will cover your debts if you don't pay. This means your loan is FHA insured and is one of the reasons why FHA home loans cost less and are easier to get with a limited credit history or a credit history with some trouble but a record of recent consistent payments. A loan backed by the U.S. Government is a loan that is sure to be paid off, one way or the other.
Unfortunately, the phrase "FHA insured loan" brings more confusion among new borrowers because of a requirement for homeowners to carry something called Mortgage Insurance. If you apply for an FHA mortgage, one of the costs of your new FHA home loan is known as a Mortgage Insurance Premium or MIP.
IF THE FHA INSURES MY LOAN, WHY DO I HAVE TO PAY A MORTGAGE INSURANCE PREMIUM?
Mortgage insurance is a standard part of buying a home. It's a requirement on both conventional loans and FHA guaranteed loans. The mortgage insurance on conventional loans includes what's known as Private Mortgage Insurance. To get an FHA loan, you pay what's called an Up Front Mortgage Insurance Premium or UFMIP for short, plus a monthly Mortgage Insurance Premium or MIP.
HOW MUCH DO I PAY UP FRONT?
The cost of Up Front Mortgage Insurance Payments is calculated at 1.75% of the base loan amount. You have the option to include this amount in your FHA mortgage. Ask your lender how this works.
HOW MUCH DO I PAY EVERY MONTH?
Your monthly mortgage insurance includes a premium of .55% of the loan amount. You pay this every month for at least five years. There is no set amount of mortgage insurance or fixed rate which applies to all borrowers since UFMIP and MIP rates are determined based on the amount of your particular FHA mortgage or FHA home loan.
WHEN DO I STOP PAYING?
If your FHA loan lasts 15 years or more, your MIP will be cancelled when the loan-to-value (LTV) reaches 78%. This is calculated based on the original value of your FHA home loan and only if the borrower has paid the annual MIP amounts for at least five years. For FHA mortgages with terms of less than 15 years, monthly insurance payments or MIP stop when the LTV reaches 78%.
The kind of insurance the FHA offers your loan and the kind of mortgage insurance payments you make as a borrower are quite different. It may interest you to know that people taking out conventional home loans are also required to carry mortgage insurance. Terms may be different between private mortgage insurers and the kind of insurance required by the FHA, but the basic coverages are similar. If you are unsure of terms, specific length of time you must carry mortgage insurance, ask your lender to explain the UFMIP and MIP programs in detail.