FHA Mortgage Insurance
If you have an FHA mortgage loan, one thing you can be certain of and that is that you will be required to carry FHA mortgage insurance in most cases. However, the program was actually instituted to help first time home buyers qualify for a home mortgage loan without the conventional 20% down payment which many lenders require. In order to protect United States taxpayers from picking up the tab on foreclosed homes, the government instituted this mandatory coverage. Even so, it is a small price to pay in return for being made eligible to own your own home.
Why FHA Mortgage Insurance Is Necessary
Actually, FHA mortgage insurance is not unlike conventional private mortgage insurance (PMI) in concept. Most conventional mortgage lenders will require PMI if the down payment on a home is less than the traditional 20% up-front requirement. This is only understandable since there is a great deal of risk involved for the lender. Should it become necessary to foreclose on the home, that lender wants to be assured that their investment is secure; thus the need for mortgage insurance. Similarly, the federal government guarantees FHA loans and doesn’t want to be stuck with paying for defaulted loans.
Up-Front Fees and Annual Mortgage Premiums
One of the areas where the FHA mortgage insurance premium (MIP) differs from PMI is in the up-front fees. At closing a 1.5% up-front fee is required but it is usually amortized over the life of the loan. Rates vary as well between conventional and FHA loans. While conventional mortgage loans have different rates based on creditworthiness and other factors, FHA interest rates are based on strict guidelines imposed by the federal government. As of October, 2010, the annual MIP cap was raised from .5% to 1.5% on loans originating with a down payment equal to or greater than 5% while loans originating with a down payment of less than 5% can be charged an annual MIP of 1.55%.
Exceptions and Removal
The government did legislate some exceptions to the rule, however. One good example is that if the homebuyer places a minimum of 10% down at closing AND the mortgage loan is for a period of 15 or less years, the MIP will then be cancelled at such time when the balance of the loan equals or falls below 78% of the lesser of the original sales price or the original appraised value. Another exception of note is that homebuyers who take out a loan for a term of 15 years and have at least 20% down will not be required to pay the MIP. While the MIP is a requirement for the first five years on loan terms longer than 15 years, even should the balance fall below that 78% mark, there are some mitigating circumstances. If the balance of the loan falls anywhere below 80% of the current market value of the home, the MIP requirement can be removed.
The biggest difference between PMI and federally legislated MIP is the fact that there is a ceiling or cap on what premiums can run. Private mortgage insurance is generally higher and conventional lenders may not make provisions for removal once certain conditions are met. FHA mortgage insurance is in place to enable more first time home buyers to actually be able to qualify for a home mortgage loan. Owning your own home truly is part of the American Dream and if FHA mortgage insurance is a requirement, it is really a very small price to pay for the privilege of coming home each night to something that rightfully belongs to you.