FHA Mortgage Insurance Requirements
The majority of mortgage loans issued today are either conventional or government. Conventional loans are primarily those underwritten to standards issued by Fannie Mae and Freddie Mac. Government loans mean loans that carry some amount of guarantee to the lender should the loan ever go into default. These three are the FHA, VA and USDA programs and each carries its own form of mortgage insurance.
The FHA loan actually carries two forms of mortgage insurance. The first mortgage insurance premium, and it is an insurance policy, is an upfront premium lenders commonly refer to as the “upfront” mortgage insurance premium. Today, this premium is 1.75% of the loan amount and added to the base loan amount. For example, let’s say someone is buying a home and the sales price is $210,000. The borrowers elect to use an FHA loan and put down the minimum 3.5% of the sales price, or $7,350. Yet this amount does not have to be paid for out of pocket. If it were, it would be very cost prohibitive to many borrowers who are saving up to buy a home. Instead, the $7,350 is rolled into the loan amount and the final loan amount would then be $210,000 + $7,350 = $217,350. It is this amount upon which the monthly payments are calculated.
FHA loans also carry a secondary mortgage insurance premium commonly referred to as the “annual” premium because it renews each year based upon the insurance premium rate and the loan balance. This rate for a purchase using a 30 year mortgage is 80 basis points, or 0.80% of the loan balance. Using $217,350, the initial monthly premium payment is then $144 per month. The annual premium stays throughout the life of the loan and cannot be removed by any other method other than paying off the existing FHA loan by refinancing into a conventional loan.
FHA loans are popular with first time homebuyers and some may think the program is reserved for those who have never owned a home but there is no such requirement that buyers using FHA financing be first timers. It’s just popular with first time buyers due to the low down payment requirement of 3.5%. The VA loan doesn’t have a down payment requirement but are restricted to a specific class of borrowers, primarily veterans of the armed forces. USDA loans also do not require a down payment but there are restrictions on where the property can be located. USDA loans are designed to finance real estate in rural and semi-rural areas. USDA loans also limit the amount of household income to 115% of the median income for the area.
The FHA loans has been around since 1934 when it was first introduced as an effort to help provide stability and uniformity in the mortgage market and over the years and changed as times have changed. Lenders and buyers alike appreciate the FHA loan program due to the low down payment as well as the guarantee to the lender.