Understanding FHA Mortgage Insurance Requirements
02.24.23
The Biden Administration’s announcement this week of a reduction in annual mortgage insurance premiums for FHA borrowers will have a tangible impact on hundreds of thousands of people. The reduction could save an average borrower $800 a year. This reduction in MI will be the most impactful for first-time homebuyers, who make up 80% of FHA borrowers and could make it easier for underserved communities to afford their first home. This reduction could also help those buyers in higher-priced markets, saving homebuyers more money at a time when people really need it.
Whether you’re interested in an FHA loan or not, the words “FHA mortgage insurance requirements” may seem like a bit of a mystery. There’s likely some “how’s" and "why’s” you may want to know more about. So whether this is your first time hearing about FHA mortgage insurance requirements or if this is just a refresher, here’s a brief overview and some key information to help provide you with a better understanding.
First, You Need an FHA Loan
Before we define FHA mortgage insurance, let’s backtrack a bit. In order to be in the position to pay for FHA insurance, you need to have an FHA loan first. An FHA home loan is a mortgage insured by the Federal Housing Administration (FHA). Backed by the federal government, these mortgages help FHA-approved lenders extend home financing to buyers who are unable to qualify for a Conventional home loan. It’s important to note that the FHA doesn’t issue mortgages – that is the job of your lender. Instead, the agency provides insurance on mortgage payments, so more borrowers are able to attain home financing.
FHA loans are designed to make home ownership more affordable. Though they were originally intended for borrowers with less-than-perfect credit, they are now popular with a wider group of borrowers. FHA loan requirements vary depending on the loan type. Usually the credit stipulations are more lenient, but the loan requirements are stricter. With low rates, low down payment options, and flexible lending guidelines this loan type remains a top choice for many of today's homebuyers.
So How Does FHA Mortgage Insurance Work?
FHA mortgage insurance premiums are designed to protect the lender by insuring the FHA loan against default. Should the homeowner default on the loan, the lender is at least partially compensated by the government for losses. With these assurances, lenders are more likely to offer FHA loans to borrowers with lower credit scores, past credit history issues, an inability to get a Conventional loan or difficulty making a down payment. The borrower pays for this coverage through their FHA mortgage insurance premiums. These premiums, in turn, fund the FHA loan program itself.
Breaking Down Your Payment
Borrowers who use the FHA loan program to buy a home often pay mortgage insurance premiums. The premium is calculated based on the loan amount. The premium can be financed into the loan. The annual premium is charged as part of the monthly mortgage payment.
Ways to Make Your FHA Mortgage Insurance Go Away
Typically FHA borrowers are responsible for their mortgage insurance payments throughout the lifecycle of their mortgage loan. However, if the down payment is 10% or more, the mortgage insurance payments can end after 11 years. Another way to do away with FHA mortgage insurance is to refinance the FHA loan as a Conventional mortgage. However, this means having the appropriate credit qualifications and being able to meet other requirements.
Are you ready for an FHA loan? New American Funding is an FHA-approved lender that can help you take advantage of the benefits of this loan. Get started by clicking on the button below.