An FHA loan is a mortgage issued by FHA-approved lender and insured by the Federal Housing Administration (FHA). Designed for low-to-moderate-income borrowers, which require a lower minimum down payments and credit scores.

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FHA Loans and Mortgage Insurance

In exchange for the FHA’s flexible underwriting guidelines, the FHA requires borrowers to pay mortgage insurance. The insurance protects the lenders if you default on your loan. Lenders can file a claim with the FHA and receive a portion of the money they lost on the mortgage back.

The FHA charges two mortgage insurance premiums – upfront mortgage insurance and annual mortgage insurance.

Upfront Mortgage Insurance on FHA Loans

Borrowers pay the upfront mortgage insurance at the closing (upfront). The current premium equals 1.75 percent of the loan amount. For example, if you borrow $200,000, you’d pay $3,500 at the closing. Unlike conventional loans, your upfront MIP isn’t correlated to your credit score or DTI. Every borrower pays the same amount.

If you need help paying the upfront mortgage insurance fee, negotiate it with the seller. Many sellers will help with closing costs including the upfront MIP, making it easier for you to qualify for the loan.

Annual Mortgage Insurance on FHA Loans

In addition to the upfront MIP, borrowers pay annual mortgage insurance premium on the outstanding principal balance. The average borrower pays 0.85% of the outstanding loan amount in annual MIP. This is for a 30-year fixed loan with an LTV of 95 percent or greater. Using the $200,000 example again, you’d pay $1,700 per year, but paid monthly. Your monthly mortgage payment would increase $142.

Borrowers pay annual mortgage insurance on FHA loans as long as there’s an outstanding balance. Unlike conventional loans, you can’t cancel the insurance when you owe less than 80 percent of the home’s value. The mortgage insurance premium decreases each year though, as you pay your principal balance lower.

The only way to eliminate mortgage insurance is if you qualify for one of the exceptions discussed below or you pay the loan off by refinancing into a conventional loan or paying the loan off in full.

Exceptions to the Mortgage Insurance Premium Rule

If you put down more than 10 percent of the sales price on the home, you may cancel the MIP after 11 years on both a 15-year and 30-year term.

I have worked with FHA loans for many years. I can help you understand the mortgage insurance, how it affects your payments, and the total amount it will cost you over the life of the loan.

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