Having minimal funds for a down payment, credit missteps and moderate income make getting a home loan difficult. Borrowers with such problems can turn to the Federal Housing Administration, which insures mortgages and makes it easier for you to buy or refinance. FHA mortgage insurance increases your monthly payments, but adds an extra measure of protection for the lender and the FHA, making it possible for it to finance you despite your financial challenges.
The FHA requires only 3.5 percent down on most of its programs. When lenders finance more than 80 percent of a home's value, they typically require mortgage insurance. The coverage protects the lender in the event of default, reimbursing its losses when you miss payments or end up in foreclosure. The Department of Housing and Urban Development, which oversees the FHA, insures the loans as opposed to a private mortgage insurance (PMI) company, which insures non government-backed loans.
You pay two mortgage insurance premiums to the FHA. The Up-Front Mortgage Insurance Premium is a single payment due at loan closing. Rather than pay the charge out of pocket, most borrowers include it in their loan amount and pay it over the life of the loan. The annual mortgage insurance premium is due each month along with your loan payment. Your lender may collect several months' worth of mortgage insurance at closing, which it keeps as reserves in the event you miss payments.
The FHA changes the cost of insurance based on its financial needs. For example, as of April 2013, the agency charges 1.35 percent of the loan amount for the annual mortgage insurance premium -- an increase of .10 percent from the previous year. It also requires that borrowers pay the annual premium for the life of the loan. Previously, the FHA automatically cancelled the premium when the loan balance reached 78 percent of the original loan amount. The Up-Front Mortgage Insurance Premium is 1.75 percent of the loan amount as of April 2012.
As the beneficiary of the mortgage insurance coverage, your lender may receive payment from HUD to help you avoid foreclosure. The FHA's partial claim option allows the lender to file a claim for a one-time payment from the FHA-Insurance Fund, which brings your loan current. Eligible borrowers have between four and 12 missed payments and can resume regular payments after the partial claim. HUD places a lien on your home for the claim amount, which you must repay in full upon selling or refinancing your home.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.