Most potential borrowers are familiar with "the pros" or the benefits of home financing using an FHA loan product:
- Flexible qualification guidelines
- Attractive interest rates relative to credit scores
- Lower down payment options
These are the characteristics that make FHA loans appealing to borrowers. Before we explore the other side of FHA loans, let's define an FHA loan.
What is an FHA Loan?
FHA loans are government insured loans. The insurance provided by HUD is what protects lenders originating these loans from the risks of lending, like a borrower default on the mortgage. This protection comes in the form of Private Mortgage Insurance or PMI.
PMI and FHA Loans
FHA loans have Monthly and Upfront Mortgage Insurance Premiums.
- Upfront Mortgage Insurance: a premium based on 1.75% of the loan amount; it can be financed into the loan or paid in a lump sum at closing.
- Monthly Mortgage Insurance: an amount added on top of your monthly principle interest, taxes and insurance payment (PITI); it is based on .80% - .85% of the loan amount
Mortgage insurance applied to FHA loans are not optional. Regardless of down payment amount the premiums will be applied to the loan. It can never be cancelled or reduced.
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Please Note: This article is provided for illustrative purposes only. It is not an offer or commitment to lend money, and it is not an advertisement for a specific mortgage or a specific interest rate. Contact me to run the numbers for your situation.