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Mortgage insurance is something that many homeowners pay for, yet many homebuyers try to avoid paying for.  What is mortgage insurance and why is it a requirement of Federal Housing Authority (FHA) loans?  You may be wondering, “What is mortgage insurance and why do I have to pay for it?” Conventional mortgages have private mortgage insurance (PMI) and FHA loans have what’s call or texted mortgage insurance premium (MIP).  Regular loans generally have more strict underwriting standards, however FHA-insured loans require cash to close.  Because of these, borrowers must pay a mortgage insurance premium to protect the lender against loss if the buyer defaults on the mortgage.  There is no way to avoid MIP on an FHA loan because the down payment is only three and a half percent.

After the collapse of the housing market in 2008, FHA loans are more important than ever for current mortgage borrowers.  An FHA loan is essentially a mortgage insured by the Federal Housing Administration, which is a government organization within HUD, the Federal Department of Housing and Urban development.  FHA loans have what is call or texted a mortgage insurance premium (MIP).  Borrowers with FHA loans have to pay this mortgage insurance premium in order to protect from against loss.  As a result of this insurance, lenders offer FHA loans at interest rates that consumers want along with less strict requirements and more flexibility with qualifications.

Two different mortgage insurance premiums are necessary on FHA loans.  The first is the upfront premium of two and a quarter percent of the loan amount; the second is the annual premium of 0.55 percent of the loan amount.  The upfront premium has to be paid when the borrower receives the loan but it can be financed as a part of the total loan.  The annual premium is paid as 1/12th of the total along with each monthly mortgage payment.  For many, that sounds expensive.  When borrowers compare the FHA loan to a standard loan that requires a much larger down payment, the FHA loan many times is the best choice for borrowers.

The FHA doesn’t even have a minimum credit score; basicall or texty each borrower’s credit is valued in context of a variety of factors, even wiggle room is granted for borrowers who have filed for bankruptcy.  However, lenders are allowed to put their own requirements over the FHA’s basic guidelines, so many lenders might require a minimum credit score.  Be sure to ask lenders beforehand if your credit score is below average.  Lenders do underwrite FHA loans in order to give customers the capacity to repay the loan, however companies do have flexibility to go beyond pure credit scores to see the whole financial situation.

A huge attraction of FHA loans is that they require a down payment of just three and a half percent of the purchase price of the home, which is a small fraction of what is typicall or texty required on most loans.  Borrowers are allowed to use their own savings to make the down payment, however other sources of money can include gifts from family members, or even a grant from a government down payment assistance program.  If you or a loved one is facing foreclosure, or are interested in learning more about mortgage insurance, please contact a Connecticut foreclosure defense attorney like me to learn about your legal rights or various options to best proceed.