FHA Mortgage Insurance: Who Needs It And How Much It Costs

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FHA Mortgage Insurance: Who Needs It And How Much It Costs

If you’re buying a home for the first time, you might be eying an FHA mortgage. These loans make it easier to get into a home thanks to less strict credit and down payment requirements. However, you may not realize that FHA loans also come with a certain type of mortgage insurance, an added cost that makes FHA loans more expensive. If you would like to estimate your FHA Loan payments, our free FHA loan calculator is a great resource to do so.

Here’s what you need to know about FHA mortgage insurance before applying for a loan.

FHA Mortgage Insurance vs. Private Mortgage Insurance

If you take out a home loan and make a down payment of less than 20% or refinance an existing mortgage with less than 20% equity, you’re typically required to pay private mortgage insurance (PMI). Putting less than 20% down makes you a higher-risk borrower, so PMI protects the lender financially in case you aren’t able to make your mortgage payments and the property goes to a short sale or foreclosure.

When a conventional mortgage lender requires you to pay PMI, it establishes an insurance policy through its network of providers and then works out the details with you at closing. You can choose to pay your annual insurance premium up front, or have it rolled into your mortgage loan and paid in installments along with your mortgage payments.

Though similar, FHA mortgage insurance works a bit differently than private mortgage insurance on a conventional loan. Let’s take a closer look at the details of FHA mortgage insurance below.

How FHA Mortgage Insurance Works

An FHA loan is a certain type of mortgage that’s backed by the Federal Housing Administration. It’s designed to help prospective homeowners who wouldn’t otherwise qualify for an affordable conventional loan, especially first-time homebuyers. FHA loans are available to borrowers with credit scores of at least 500. It’s possible to put as little as 3.5% down with a credit score of at least 580, otherwise a down payment of at least 10% is required.

Unlike private mortgage insurance, FHA mortgage insurance is required on all FHA loans— regardless of the down payment amount—and can’t be cancelled in most cases.

Currently, if you put down less than 10% on an FHA loan, you’re required to pay mortgage insurance for the entire length of the loan. If you put down 10% or more, the mortgage insurance can be removed after 11 years of payments.

FHA Mortgage Insurance Costs

There are two components to FHA mortgage insurance. First, there’s an upfront mortgage insurance premium of 1.75% of the total loan amount. So if you borrowed $150,000, you’d be required to pay an upfront fee of $2,625.

You’re also required to pay an annual mortgage insurance premium of 0.45% to 1.05% of the loan amount, depending on a few factors.