How Does FHA Mortgage Insurance Work?

Posted 2 years, 4 months ago

Loans backed by the Federal Housing Administration (FHA) have become increasingly popular over recent years.  Some of the reasons for their renewed popularity are as follow:

• FHA has low down payment requirements
• FHA allows refinances without appraisal in some cases
• FHA mortgage rates are very competitive and can be even lower than conventional rates

How Does It Work?

The Federal Housing Administration's role in mortgages is different from the role of Fannie Mae and Freddie Mac. The FHA doesn't "buy mortgages" from banks like Fannie and Freddie do to create market liquidity.  Rather, the agency is an insurer of mortgages.  The agency's function is to repay the bank's loss in the case of default, much like an auto insurer would pay a consumer for a loss due to accident.

Types of Mortgage Insurance Premiums

FHA mortgages will come with two types of mortgage insurance premiums; the Upfront Mortgage Insurance Premium (UFMIP) and the annual Mortgage Insurance Premium (MIP).  All FHA-insured homeowners are required to pay both forms of MIP. 

• Upfront Mortgage Insurance Premium (UFMIP): a premium that is paid one time at closing. The upfront premium can be added to the loan amount to reduce out-of-pocket closing costs.  
• Annual Mortgage Insurance Premium (MIP): It's paid in 12 installments annually and included in your monthly mortgage payment. Annual MIP is required on all FHA mortgages. 

Low interest rates and low down payment requirements make FHA loans a great option. Please feel free to contact us with any questions or if you’d like to learn more about FHA loans.

-The Kavanewsky Team

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