The FHA loan is government-backed which means there is an inherent guarantee to the lender. As long as the lender approved the loan using proper FHA guidelines, if the loan ever goes into default, the lender is compensated for the loss. This is one of the primary reasons lenders are more willing to finance a low down payment loan because of this guarantee. The guarantee is funded by two separate mortgage insurance premiums, the Upfront Mortgage Insurance Premium, or UFMIP and an annual premium. The upfront premium is 1.75% of the initial loan amount but is not paid for out of pocket but instead rolled into the final loan amount. The annual premium is paid in monthly installments and varies based upon the loan’s term and loan amount compared to the appraised value of the property.
The FHA mortgage program is available in both fixed and variable rate options. Fixed rates can be obtained in terms ranging from 10 to 30 years. Variable rate programs can adjust once per year or can come in the form of a hybrid. A hybrid is an adjustable rate loan that is fixed for an initial period of time before changing into a loan that can adjust annually.