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Federal Housing Administration (FHA) mortgage insurance protects lenders from a loan default. A default occurs when a homebuyer fails to pay back a home loan. The FHA is a US governmental agency responsible for insuring mortgage loans. FHA mortgage insurance encourages lenders to loan money to low-income and middle-income home buyers because it reduces a lender’s risk of losing money.
If a homebuyer is low-income or middle-income, he may be able to get an FHA home loan. A homebuyer may also refinance an existing mortgage with an FHA loan. The FHA is not actually making the loan. Instead, a private lender makes the loan and requires the homebuyer to purchase FHA mortgage insurance to qualify for the loan. In other words, if a homebuyer wants a home loan, he must pay for FHA mortgage insurance.
Low-income and middle-income homebuyers have difficulty getting home loans because they are unable to put at least 20 percent down on a home. This makes lenders hesitant about loaning money to them because the lender is unlikely to recover their money if the buyer defaults. With FHA mortgage insurance, a buyer is not required to put 20 percent down on a home. The insurance also reduces a lender’s risk because the FHA pays the unpaid balance of a loan if a default occurs. This gives low-income and middle-income people an opportunity to buy a home.
The cost of FHA mortgage insurance is based on a percentage of the loan amount. The homebuyer must pay the initial premium on the insurance up front. This amount is usually financed into the loan, which means that it is added to the loan amount. Thereafter, the homebuyer pays a monthly fee to cover the cost of the FHA mortgage insurance. The monthly fee is also based on a percentage of the loan balance.
Typically, a homebuyer must continue paying the cost of FHA mortgage insurance for a minimum of five years. After this time expires, the homebuyer may cancel the FHA mortgage insurance if the buyer owes 78 percent or less on the loan. Most homebuyers cannot cancel the insurance unless both conditions are satisfied. The term of the home loan also affects when the obligation terminates on the monthly fee for the insurance. For instance, a homebuyer who gets a home loan with a 15-year term or less may be eligible to cancel the insurance as long as he owes 78 percent or less on the loan without having to satisfy the five-year requirement.