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Understanding The Federal Housing Administration's purpose will help explain Mortgage Insurance and the difference between FHA Insured Home Loans and Private Mortgage Insurance backed Loans
The Federal Housing Administration (FHA) is a United States government agency created in part by the National Housing Act of 1934. The FHA sets standards for construction and underwriting and insures loans made by banks and other private lenders for home building. The goals of this organization are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market.
1934, the FHA and HUD have insured over 34 million home mortgages and 47,205
multifamily project mortgages. Currently, the FHA has 4.8 million insured single-family
mortgages and 13,000 insured multifamily projects in its portfolio.
Mortgage insurance protects lenders from
mortgage defaulting. If a property purchaser borrows more than 80% of the
property's value, the lender will likely require that the borrower purchase private
mortgage insurance to cover the lender's risk. If the lender is FHA approved
and the mortgage is within FHA limits, the FHA provides mortgage insurance that
may be more affordable, especially for higher-risk borrowers
Lenders can typically obtain FHA mortgage
insurance for 96.5% of the appraised value of the home or building. FHA loans
are insured through a combination of an upfront mortgage insurance premium
(UFMIP) and annual mutual mortgage insurance (MMI) premiums. The UFMIP is a
lump sum ranging from 1 – 2.25% of loan value (depending on LTV and duration), paid
by the borrower either in cash at closing or financed via the loan. MMI,
although annual, is included in monthly mortgage payments and ranges from 0 –
1.35% of loan value (again, depending on LTV and duration).
If a borrower has poor to moderate credit
history, MMI probably is much less expensive with an FHA insured loan than with
a conventional loan regardless of LTV – sometimes as little as one-ninth as
much depending on the borrower's credit score, LTV, loan size, and approval
status. Conventional mortgage insurance rates increase as credit scores
decrease, whereas FHA mortgage insurance rates do not vary with credit score.
Conventional mortgage premiums spike dramatically if the borrower's credit
score is lower than 620. Due to a sharply increased risk, most mortgage
insurers will not write policies if the borrower's credit score is less than
575. When insurers do write policies for borrowers with lower credit scores,
annual premiums may be as high as 5% of the loan amount.
A borrower's down payment may come from a
number of sources. The 3.5% requirement can be satisfied with the borrower
using their own cash or receiving a gift from a family member, their employer,
labor union, or government entity. Since 1998, non-profit organizations have
been providing down payment gifts to borrowers who purchase homes where the
seller has agreed to reimburse the non-profit organization and pay an
additional processing fee. In May 2006, the IRS determined that this is not
"charitable activity" and has moved to revoke the non-profit status
of organizations providing down payment assistance in this manner. The FHA has
since stopped down payment assistance program through third-party nonprofit
organizations. There is a bill currently in Congress that hopes to bring back
down payment assistance programs through nonprofit organizations.
FHA mortgage insurance
The FHA insurance payments include two parts:
the upfront mortgage insurance premium (UFMIP) and the annual premium remitted
on a monthly basis—the mutual mortgage insurance (MMI). The UFMIP is an
obligatory payment, which can either be made in cash at closing or financed
into the loan, and thus paid over the life of the loan. It adds a certain
amount to your monthly payments, but this is not PMI, nor is it the MMI. When a
homeowner purchases a home utilizing an FHA loan, they will pay monthly
mortgage until the loan is paid down to 78% of the appraised value to minimum
of five years. The MMI premiums come on top of that for all FHA Purchase Money
Mortgages, Full-Qualifying Refinances, and Streamline Refinances.
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