Whether this is your first or tenth home purchase, shopping for a new home is…
FHA mortgages are great for homebuyers without a sizable down payment or with low credit. Each situation is unique and based on a combination of factors like income, credit, and the property’s value, but most lenders will consider FHA loans with a 3.5% down payment and a credit score above 580.
To use an FHA loan, you will need to pay mortgage insurance premiums.
What is Mortgage Insurance?
When using a mortgage product that requires insurance, like an FHA loan, the mortgage insurance is included to provide protection to the lender in case you, the borrower, is unable to pay your loan back. You, the borrower, will pay those premiums, called mortgage insurance premiums, as part of your monthly payment.
How Much Is FHA Mortgage Insurance?
The Upfront Mortgage insurance for an FHA loan is 1.75% of the loan value. You can pay this in one lump sum at purchase or add it to your loan amount. If your down payment is higher, your mortgage insurance is lower. The length of your loan, amount of your down payment, and purchase price will all impact the exact value of your mortgage insurance premium.
For example, if you purchase a home for $250,000 and put 3.5% down ($8,750), you will borrow $241,250 to purchase your home. 1.75% of that amount is $4,221.88. You can either pay this up front or spread it out. For a 30-year loan, that amounts to $11.72 additional each month.
There is an additional annual Mortgage Insurance Premium that is divided over 12 months into your monthly payment. The factors that impact your mortgage insurance premium amount include the amount of your loan, the amount of your down payment, your credit, and the length of your loan. The best thing you can do is talk to your lender about your options and have them provide simulations to see how each factor changes your overall costs.
Will I Always have to Pay Mortgage Insurance Premiums?
For an FHA loan, your mortgage insurance requirement remains through the life of your loan if you put down less than 10% of the purchase price as a down payment. If you are able to put down 10% or more, your mortgage insurance requirement will go away after 11 years. These terms will be specified in your loan agreement. To avoid mortgage insurance, you may decide to take more time to save up for a larger down payment or purchase a less expensive home.
After purchasing with an FHA loan, you might have the option to refinance into a conventional loan that does not require mortgage insurance once you have paid down your home for a while. Your lender will be able to tell you if your current situation (also based on your income, credit, equity, and home’s value) is a good candidate for refinance.
Other loan products sometimes require private mortgage insurance for a short amount of time or allow borrowers to put down a low down payment without mortgage insurance, provided they meet other criteria. Talking to your lender about all of your options is always the best plan before buying a home.