How Does FHA Mortgage Insurance Work?
Updated: Apr 1, 2019
Loans that have become increasingly popular in recent years are loans that are backed by the Federal Housing Administration (FHA). This renewed popularity is likely due to:
FHA allows refinances without appraisal in some cases
FHA mortgage rates are very competitive and can be even lower than conventional rates
FHA has low down payment requirements
If you're considering an FHA-backed mortgage for your upcoming purchase or refinance, you'll need to know how FHA mortgage insurance works. Keep in mind that the Federal Housing Administration's role in mortgages is different from the role of Fannie Mae and Freddie Mac. Unlike Fannie Mae and Freddie Mac, the FHA doesn't "buy mortgages" from banks to create market liquidity. Instead, the agency is an insurer of mortgages. Their function is to repay the bank's loss in the case of default, similarly to the way an auto insurer would pay a consumer for a loss due to accident.
There are two types of mortgage insurance premiums that FHA mortgages will come with; the Upfront Mortgage Insurance Premium (UFMIP) and the annual Mortgage Insurance Premium (MIP). It is required that all FHA-insured homeowners pay both forms of MIP.
The FHA's current Upfront Mortgage Insurance Premium (UFMIP) is 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.
The other type of FHA’s mortgage insurance is the annual Mortgage Insurance Premium (MIP). This is paid in 12 installments annually and included in your monthly mortgage payment. All FHA mortgages require annual MIP.
For low interest rates and low down payment requirements, FHA loans are a great option. Please don’t hesitate to contact us with any questions or if you’d like to learn more about these types of loans.