FHA Mortgage Insurance: A Closer Look

Navigating the housing market presents an intimidating undertaking for people looking to purchase their first homes. The current housing climate and its various obstacles can make the process seem like a gauntlet of daunting challenges. If you aren’t familiar with property purchases, you’ll encounter options that could make your first house more accessible regardless of the challenges.

One such option is an FHA loan. It comes with FHA mortgage insurance to help you procure the loan. But how does mortgage insurance for FHA loans work? And what does FHA mortgage loan insurance entail? Champions Mortgage Team breaks down the pertinent details to help you navigate your new investment.

What Is FHA Mortgage Insurance Premium (MIP)?

What is Federal Housing Administration-based mortgage insurance? The federal authority mandates these FHA loans to people who use them for property purchases. Many of the applicants possess low credit scores or don’t have a lump sum of money to put down on the house they want to purchase.

These loans can assist people in purchasing a piece of residential property as it becomes available and pay back the amount over a set repayment period. An FHA loan is a common choice since it has fewer requirements than many traditional mortgage loans. Most applicants only need a FICO score of 500 and access to money for the upfront MIP payment.

A Federal Housing Administration loan is a type of loan that you can still procure from a bank or mortgage lender to purchase the house. After securing your loan, you’ll pay the FHA mortgage insurance premium in addition to any other fees required.

Typically, you will need to pay the MIP upfront as soon as you close on your house. This is the portion that sometimes pushes up the loan’s Annual Percentage Rate compared to other mortgage loan options, despite the competitive interest rates.

A lender may also tank on an additional annual payment to insure the loan until you pay it off in full. The figure is an FHA annual mortgage insurance premium and ensures you have a mortgage fully insured by the FHA through your payments.

How Does FHA Mortgage Insurance Work?

Why would you want an FHA loan? It’s a great option for anyone who doesn’t have a lump sum available for a downpayment on a property they want to purchase. These loans have more lenient requirements, and even people with FICO scores of at least 500 can access them. That’s why FHA loans are so helpful in helping people become homeowners where they wouldn’t otherwise be able to take advantage of that opportunity.

Where does the FHA insured mortgage fit into the equation? It protects the lender from default on the borrower’s part (when they can’t come up with the mortgage payments or related costs for any reason). Otherwise, a lender takes on a significant risk in loaning money to people with low savings or unfavorable FICO scores.

Without the insurance portion, no person or establishment would feel comfortable about lending money to borrowers who appear unreliable on paper. The mortgage insurance protects the lender, as the insurance provider will cover any unpaid mortgage balances so that the lender doesn’t bear the loss if the borrower defaults.

What else do you need to know about FHA loan mortgage insurance?

• Does FHA require mortgage insurance? Yes, the FHA requires you to take out mortgage insurance with any loan it underwrites.
• What does FHA mortgage insurance cover? The FHA insurance typically covers a remaining loan balance unpaid by a borrower who defaults on the mortgage.
• Do FHA loans require mortgage insurance even if the downpayment is small? Yes, the FHA will require insurance on all loan amounts.
• Is an FHA mortgage insurance reduction possible? If you currently own a home financed by an FHA loan, you cannot reduce your insurance rate without refinancing your mortgage.

You may be able to avoid some pitfalls associated with FHA loans and insurance, such as limited reduction options, if you shop for other lenders that don’t require this insurance policy. However, a low credit or FICO score makes this search a real challenge.

How Much Does the FHA’s Mortgage Insurance Cost?

The FHA MIP will be a percentage of your loan, but how much is FHA mortgage insurance for the annual payments? The annual costs depend on your initial downpayment and your mortgage term’s length, many of which last around 15 years. Below are some considerations for how to calculate FHA mortgage insurance if you want to see whether it will be worth it.

15 Years Mortgage Term or Longer

Longer mortgage terms of 15 years or more may offer slightly lower annual payments. However, the lengthy terms that can stretch toward 30 years often mean that you pay more interest. That’s understandable because the longer a homeowner takes to pay off a piece of property, the greater the chance of eventual default.

15 Years Mortgage Term or Shorter

Mortgage terms that last 15 years or less tend to have less expensive annual insurance payments and will trend toward paying less interest on the loan overall. Shorter mortgage terms garner far less interest than longer ones because the risk of default is lower. They also allow less time for unfortunate circumstances to unfold, which is why they represent a safer investment for lenders facing economic pressures or changing industry regulations.

How Long Do You Have to Pay FHA MIP?

The amount of time an FHA MIP binds you rests on a percentage of your initial downpayment. A higher percentage will usually reduce the time you commit to paying a MIP. However, paying a smaller downpayment will mean having to pay MIP fees for longer until you’ve finally reimbursed the loan in full.

Many homeowners who can’t afford a sizable downpayment ask about how to get rid of mortgage insurance FHA loans require. And there are a few considerations.

How Can You Avoid FHA Mortgage Insurance?

Unfortunately, the only surefire method for FHA mortgage insurance removal involves saving every penny you make. If you made a downpayment of 10%, the lender may drop or eliminate your insurance payments after 11 years. Otherwise, you can only end your MIP payments permanently by repaying the remainder of your loan.

Why not consider the following strategies?

• Develop a passive stream of income to buffer your bank account.
• Cut extra expenses or activities that aren’t necessary for basic well-being. For example, streaming services and memberships can cost you hundreds of dollars over time.
• Use extra disposable income in your monthly budget to repay the loan.
• Improve your credit score and refinance the loan.

If you have yet to close on a new property, why not try saving up to pay the full downpayment amount on the purchase? This will prevent your MIP from running into a lengthy commitment. Alternatively, work with a reputable service like Champions Mortgage to find more compatible options or other tips on how to remove FHA mortgage insurance quickly.

Bottom Line

Are you planning a loan application to purchase the home of your dreams? Do you have FHA mortgage insurance already? Let us help you find ways to lower your rates or manage your loan in more economical ways, including removing mortgage insurance when eligible and exploring options for deffered mortgage payments.

Call Champions Mortgage at (281) 727-2500 today for professional services and great advice on homeownership and more.