FHA mortgage insurance protects lenders against loan defaults and encourages them to lend to low- and middle-income homebuyers. Buyers pay an initial premium and monthly fee based on loan amount and balance. After five years, buyers can cancel insurance if they owe 78% or less of the loan.
Federal Housing Administration (FHA) mortgage insurance protects lenders against a loan default. A default occurs when a home buyer fails to repay a home loan. The FHA is a US government agency responsible for insuring mortgage loans. FHA mortgage insurance encourages lenders to lend money to low- and middle-income homebuyers because it reduces the lender’s risk of losing money.
If a home buyer is on a low or middle income, they may be able to get an FHA home loan. A home buyer can 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 home buyer to purchase FHA mortgage insurance to qualify for the loan. In other words, if a home buyer wants a home loan, he has to pay for FHA mortgage insurance.
Low- and middle-income homebuyers find it difficult to get home loans because they are unable to put at least 20 percent down on a home. This makes lenders reluctant to lend them money because the lender is unlikely to get their money back if the buyer defaults. With FHA mortgage insurance, a buyer is not required to put 20% down on a home. Insurance also reduces a lender’s risk because the FHA pays off the unpaid balance of a loan if a default occurs. This gives low- and middle-income people the opportunity to buy a home.
The cost of FHA mortgage insurance is based on a percentage of the loan amount. The home buyer must pay the initial insurance premium up front. This amount is usually funded into the loan, which means it is added to the loan amount. Next, the home buyer pays a monthly fee to cover the cost of FHA mortgage insurance. The monthly fee is also based on a percentage of the loan balance.
Typically, a home buyer must continue to pay the cost of FHA mortgage insurance for a minimum of five years. After this time, the home buyer can cancel the FHA mortgage insurance if the buyer owes 78% or less of the loan. Most homebuyers cannot cancel their insurance unless both conditions are met. The duration of the loan also affects the expiry of the obligation on the monthly insurance fee. For example, a homebuyer who takes out a home loan with a term of 15 years or less may be eligible to cancel insurance as long as they owe 78% or less on the loan without having to meet the five-year requirement.
Smart Assets.
Protect your devices with Threat Protection by NordVPN
