It’s easy to become confused by Federal Housing Authority (FHA) insurance requirements concerning Private Mortgage Insurance (PMI). An FHA loan is in fact just a conventional mortgage loan guaranteed by the FHA, which is a federal agency operating under the U.S. Department of Housing and Urban Development (HUD). Interestingly, though, although the FHA provides insurance to the mortgage creditor, the FHA also requires borrowers to purchase PMI.
FHA Insurance
To clear up the confusion, the FHA does not actually require borrowers to purchase PMI from a traditional, personal PMI company. Instead, the PMI a borrower pays actually goes directly to the FHA. The FHA is your insurance company. Sothe PMI payments you make actually cover your FHA insurance on your loan. In exchange for your PMI payments, the FHA guarantees to lenders when the lender forecloses, then the FHA will purchase the house for the complete value of the mortgage loan. The FHA requires PMI payments for as long as you’ve got less than 20% equity in your property. Since many FHA borrowers only supply the minimal 3.5 percent down payment, most borrowers should pay PMI.
Closing Prices
The FHA requires two kinds of PMI premium payments. The first is that a sizable premium payment that the borrower must pay at the time of closing on the mortgage loan. Before 2010 the FHA required an initial PMI payment equivalent to 1.75% of the whole loan amount. However, as of 2010 the FHA increased that initial payment to 2.25 percent of the entire loan amount. However, borrowers who take part in a FHA-approved”HELP–Homebuyer Education Learning Program” can qualify for the elderly 1.75 percent premium payment.
Monthly Premiums
The second type of PMI premium payment required by the FHA is monthly PMI premium payments for as long as the borrower has less than 20% equity in the house. If your house has increased in value as closing, then you may have a current appraisal performed to prove that you now have 20% in the house. Until that happens, the FHA requires monthly payments equivalent to 1/12 of 0.5 percent of the entire loan amount.
