FHA mortgage insurance protects lenders from loan defaults and encourages them to lend to low- and moderate-income homebuyers. Buyers pay an initial premium and monthly fee based on a percentage of the loan amount, and can cancel the insurance after a minimum of five years if they owe 78% or less on the loan.
Federal Housing Administration (FHA) mortgage insurance protects lenders from defaulting on a loan. A default occurs when a homebuyer defaults on a mortgage loan. The FHA is a United States government agency responsible for insuring mortgage loans. FHA mortgage insurance encourages lenders to lend money to low- and moderate-income homebuyers because it reduces the risk that a lender will lose money.
If a homebuyer is low or moderate income, they can get an FHA home loan. A homebuyer can also refinance an existing mortgage with an FHA loan. FHA is not actually making the loan. Instead, a private lender makes the loan and requires the buyer to purchase FHA mortgage insurance to qualify for the loan. In other words, if a homebuyer wants a home loan, they must pay for FHA mortgage insurance.
Low- and moderate-income homebuyers have a hard time getting home loans because they can’t afford at least 20 percent of the home. This makes lenders hesitant 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 pay 20 percent on a home. Insurance also reduces a lender’s risk because FHA pays the unpaid balance on 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 buyer must pay the initial insurance premium in advance. This amount is usually financed in the loan, which means it is added to the loan amount. The buyer then 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 to pay the cost of FHA mortgage insurance for a minimum of five years. After this time expires, the homebuyer can 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 met. The term of the mortgage loan also affects when the obligation ends with the monthly insurance fee. For example, a homebuyer who obtains a mortgage loan with a term of 15 years or less may be eligible to cancel the insurance as long as they owe 78 percent or less on the loan without having to meet the five-year requirement.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
