An FHA mortgage is one insured by the Federal Housing Administration (FHA). The FHA does not actually lend the money, but instead insures loans made through FHA-approved lenders to reduce their risk if borrowers default.
The FHA program was created in the 1930s, after a swell of foreclosures and defaults, to give mortgage lenders sufficient insurance and to make loans more affordable and accessible to a greater number of consumers. FHA loans remain popular, particularly with first-time home buyers.
FHA loans are not for every borrower, but they do provide several benefits:
As FHA loans do not have the same strict lending standards as a conventional loan, borrowers typically pay a cost for an FHA loan. The biggest catch is mortgage insurance premiums, which come in two forms: one premium is paid upfront or may be financed into the loan, while the other is a monthly payment that is added to the mortgage payment.
To qualify for an FHA loan, the home you purchase must meet certain conditions and be appraised by an FHA-approved home appraiser.
Every FHA mortgage comes with mortgage insurance, regardless of the size of the down payment. With a conventional loan, mortgage insurance is only required if the down payment is less than 20%. Mortgage insurance may also be cancelled on a conforming loan, but the insurance on an FHA loan will remain for the life of the loan.
This upfront payment requires the borrower to pay a premium of 1.75% of the home loan, regardless of credit. On a $300,000 FHA loan, this upfront premium will be $5,250. This premium may be paid at closing or financed into the loan.
The annual MIP is charged monthly and depends on the loan terms and loan-to-value ratio. Currently, it may range from 0.45% to 1.35% of the loan amount.
Loans with a term greater than 15 years and a loan amount less than or equal to $625,000 have the highest annual MIP, while loans with a term of 15 years or less and a loan amount over $625,000 have the lowest premium.
Before June 3, 2013, it was possible to cancel mortgage insurance premiums after five years. Due to recent changes, this is no longer the case, and the annual FHA premium remains for the life of the loan.