August 19, 2017

FHA Mortgage Insurance – What Is It For And Why Does It Exist?

FHA mortgage insurance (MI) is an essential element of the FHA lending program.  Mortgage insurance provides an incentive for lenders to approve FHA loans and is instrumental in protecting the financial integrity of the FHA lending program by covering loan losses.

The most common questions regarding FHA mortgage insurance are answered on the website of the US Department of Housing and Urban Development (HUD).

FHA Mortgage Insurance – What Is It?

FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.

Who Pays For The FHA Mortgage Insurance, What Does It Cover And For How Long Is It Paid?

Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan. There is more flexibility in calculating household income and payment ratios. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment. In most cases, the insurance cost to the homeowner will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property -whichever is longer.

Who Receives The FHA Mortgage Premiums And Why Is It Charged?

FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely. FHA provides a huge economic stimulation to the country in the form of home and community development, which trickles down to local communities in the form of jobs, building suppliers, tax bases, schools, and other forms of revenue.