FHA loans are insured through a combination of a small upfront mortgage insurance premium (UFMIP), as well as a small monthly mortgage insurance premium. The UFMIP is often financed into the loan. Unlike other forms of conventional financed mortgage insurance, the UFMIP on a FHA loan is prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of his loan, he is entitled to a partial refund of the UFMIP paid at loan inception.
The monthly mortgage insurance premium paid is less than that of what a borrower with a conventional mortgage and excellent credit pays per month providing the LTV is 85 is greater (in other words, providing the borrower has less than 15% equity in her home). In instances where the home owner has a poor to moderate credit history, his monthly mortgage insurance premium will be substantially less expensive with an FHA loan than with a conventional loan regardless of LTV - sometimes as little as one-ninth as much per month depending on the borrower's exact credit score, LTV, loan size, and approval status. The monthly mortgage insurance premium on an FHA loan has the ability to save a credit-challenged homeowner thousands of dollars per year depending on the size of his home loan, his credit score, and his LTV.
A borrower with an FHA loan always pays the same mortgage insurance rate regardless of her credit score. This is especially of benefit to borrowers who have less than 22% equity in their homes and credit scores under 620. Conventional mortgage insurance premium rates factor in credit scores, whereas FHA mortgage insurance premiums do not.
When a borrower has a credit score under 620, conventional mortgae premiums spike dramatically. If a borrower has a credit score under 575, he may find it impossible to purchase a home for less than 20% down with a conventional loan, as the majority of mortgage insurance companies no longer write mortgage insurance policies on borrowers with credit scores under 575 due to a sharply increased risk.
When they do write mortgage insurance policies for borrowers with lower credit scores, the annual premiums are sometimes as high as 4% to 5% of the loan amount. Based on this, if a consumer is considering purchasing a new home or refinancing her existing home, she would often be well-advised to look into the FHA loan program.
When a homeowner purchases a home utilizing an FHA loan, he will pay monthly mortgage insurance for a period of five years or until the loan is paid down to 78% of the appraised value - whichever comes first.
Mortgage insurance is available for housing loan lenders, protecting against homeowner mortgage default. For a small fee, lenders can obtain insurance for a value of ninety seven percent of the appraised value of the home or building. In the event of a mortgage default, this value is transferred to the FHA and the lenders receive a large percentage of their investment. The other three percent is received from the original down payment for the home.
A borrowers downpayment may come from a number of sources. The 3% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, non-profit or government entity. Since 1998, non-profits have been providing downpayment gifts to borrowers, that purchase homes where the seller has agreed to reimburse the non-profit and pay an additional processing fee. In May 2006, the IRS determined that this is not "charitible activity" and has moved to revoke the non-profit status of groups providing downpayment assistance in this manner.
This has led to a new downpayment program conducted by a tribal government,[The Grant America Program]. This program is exempt from IRS regulations and essentially works similarly to the non-profit programs.