FHA Mortgage Insurance (PMI)

by Jeff Ragan

Wondering what FHA mortgage insurance (PMI) is and how it affects the loan...read on.

This form of private mortgage insurance (PMI) is a hidden cost for FHA home loans that many people may not be aware of.

But this type of program is the best if its your first time. Why do I say that?

Most buying their first home are not seasoned enough to meet the various conventional loan requirements.

FHA has flexible requirements that can help those buying for the first time.

Would you like to know if you qualify? .

Interestingly though, you can have the seller help with these costs. How? I'll explain below.

The FHA loan product is good for all buyers, but especially for low income buyers. Why is this? They lower many of the fees or costs associated with obtaining a low making it easier to buy.

Why do they require this mortgage insurance? By insuring the mortgage, FHA encourages lenders to consider you, when they normally wouldn't. It helps the lender to feel good about borrowing to you. It's a form of a guarantee to them that they will get their money.

You might compare it to a gold seal placed on your application with the words "guaranteed" on it.

FHA loan guarantee

Let me tell you another little story. Little did I realize when I was buying my first home, that I was to become an FHA buyer. I heard the words FHA but it meant little to me. I wanted to buy a house and really did not care how I got it.

So, when I bought my first home, in my case the seller paid the FHA mortgage insurance for me. On a sale price of $19,000 the 1.5% FHA mortgage insurance was only $285. I was so blinded by the fact I was buying a home I never gave it any thought.You though, you must be aware of these costs.

With the average home in many areas at $150,000 and above this translates into quite a sum of money. This FHA mortgage insurance premium must be paid at the closing by any of 3 parties.

  1. The buyer can pay it
  2. The seller can pay it
  3. The lender can give a credit and pay it for you

In the large majority of FHA home loans, I’ve been able to help people get the seller to pay it for the buyer. This is the most cost effective way if it’s done right.

So make sure you have a loan officer who is familiar with these loans. Also find a real estate agent who works well with first time buyers. That way they will work with the seller to help you.

This insurance has become a centerpiece of the FHA home loan programs. In the 1930's many were saved from default by means of it. Then again, after World War II, veterans were able to buy good qualify homes by means of it. Really it has shaped the mortgage finance system of today.

FHA mortgage insurance (PMI) continues to make home ownership a reality today.

Almost every person that gets this insurance on their home loan is a first time home buyer.

FHA Home Loans Has Low Down Payment Requirements

If you look at the conventional loan products, the down payment requirements start at 5% and can go up to 20%. There are some that have 3% and even offer zero down but you really pay for this in the interest rate.

Have you ever heard the saying “there’s no free lunch in this world”? It’s true. There’s not.

No matter if you use the these loan products or go conventional with a zero money down, someone’s going to pay for the risks involved.

Remember that the lenders have to be induced to do loans for first time home buyers so we have the FHA mortgage insurance to help with that. In a conventional loan, with no money down or even 3% down they pay a much higher interest rate.

The insurance allows buyers to borrow up to 96.5% of the home purchase. Sometimes they can even get 100% financing.

FHA PMI and Closing Costs

With other loan products, like the conventional ones, the closing costs are paid by the buyer at the closing. This often equals 2-3 percent of the purchase price. Whereas FHA allows 3% or up to $6,000 whichever is greater to be used towards the buyers closing costs, pre-paids and escrows. Depending on the property and program, this can go up to 6%. This is HUGE!

Little did I realize when buying my first home that’s what happened. Now I’m able to help others learn how this is done and even teach them how to get this included in their overall mortgage. Using the sellers money, your money or a combination thereof this can make it possible for you to buy a house with little or no money down.

Again, the FHA mortgage insurance (pmi) that’s paid up front at closing helps you get this done. Then the remaining premium is included in your monthly payment. One thing that I believe is a down side to this loan product is you never get to stop paying this FHA mortgage insurance. This is collected right down to your last payment.

This is not the case on conforming loans when mortgage insurance stops getting collected when you pay down the balance below 80% of the value of the home.

FHA Limits Some Home Loan Fees

Lenders are limited on some fees they can charge. Which is an awesome help to first time buyers. Lets consider one fee that is limited, the loan origination fee. Lenders can charge up to 1% of the loan amount and no more.

Processing fees cannot be charged either. Some lenders have processing fees of $500 or more. See how FHA is saving you money!

FHA Home Loans Limit the Loan Amount

FHA does not want this program to be abused and wants it restricted to buyers with low to moderate income. Thus, the mortgage loan amount is limited in how much they will insure.

Each state and county has its own limit and must be researched before trying to get this kind of a loan product.

If you’re working with a good loan officer he’ll know what’s available to you in your area. Trust me, I’ve never seen the limits where they cannot meet your needs.

Keep in mind that FHA mortgage insurance is designed to help you, the first time home buyer, become a home owner. Would you like to know if you meet their requirements? .

Where Would You Like to Go Next...

Would you like to understand the different loan options? Our Program Page has an excellent explanation of these options.

There is a true zero down home loan. Learn what that program is by reading zero down home loans page.

Are you still curious about the FHA product? Do you have more questions? FHA loan information is a cool question and answer place to find answers your looking for or ask your own questions.

Do you have questions not related to FHA home loans? Have a question is an awesome place to ask them. Go ahead...pick my brain!

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