FHA Mortgage Insurance: Option to Take Along with FHA Loans
Established in 1934, the FHA (Federal Housing Administration) under the HUD (Housing and Urban Development) has an objective to provide feasible housing solutions for the low and middle-income families. The main objective of the FHA insured mortgage loans is to protect borrowers from predatory mortgage lenders and protect lenders from loan defaulters. So both sides will benefit from the FHA program.
Many people know that FHA loans are one of the best when you have not-so-excellent credit score, or don’t have that much of money to buy a mansion. With a conventional loan, your credit is considered jointly with your income. Although the down payment is low (you can pay as low as 3% for the down payment), the monthly payments could possibly be higher than the conventional (some say so, but I rarely heard the case). But, because the government only insures the loan, the FHA-approved lenders are still free to set terms and rates. The reason why the government insures the loan is so lenders could give high-risk borrowers excellent rates and terms.
One of the things potential lenders generally get confused is an FHA mortgage insurance premium (MIP) of 1.5% of the amount of the loan be paid upon closing that is required in an FHA home loan. But instead of paying the FHA mortgage insurance upon the closing, you can add the cost of the FHA mortgage insurance premium into your monthly payment. An additional .50% FHA mortgage insurance premium is added in the PITI (principal, interest, taxes, and insurance) of each monthly payment.
So if you buy a $150,000 house, you’ll have to pay $2,250 as an FHA mortgage insurance premium upon the closing. If you place the FHA mortgage insurance into your monthly installment you’ll have to add $750 into your monthly payment. Condominiums do not require the 1.5% up-front FHA mortgage insurance premium, only the monthly .50% FHA mortgage insurance premium.
Some people say, FHA loan carry a higher mortgage interest premium than conventional ones. The truth is, if you pay a 10% down payment in a conventional loan, you’ll be required to pay .5% mortgage insurance premium, with a renewal rate .3% in subsequent years.
By the by, if you’re wondering where the FHA mortgage insurance premium goes, it goes to an account that pays for the FHA’s expenses. If you find some sinister snobby guy who thinks his tax helps to pay for the FHA, you can be sure that he’s incorrect. The FHA mortgage is really self-funded. The FHA-insured mortgage loans and the FHA mortgage insurance is made to benefit borrowers and lenders and taxpayers as well.
Because FHA lenders are free to set their own rates and terms plus the monthly insurance premium, it is possible that you get higher interest rates and higher monthly payments than conventional loan. That is why you should look for the best deal in town for your FHA home loans.
On the brighter side, the FHA helps homebuyers by setting limits on how much money mortgage companies can charge in certain fees, eg: loan origination fees which cannot be higher than 1% of the total loan amount.
Read also: FHA Financing and FHA Mortgage Calculator
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