In a recent blog post we discussed the differences between FHA mortgage loans and conventional home loans. One of the most important differences between FHA mortgages and conventional loans is the mortgage insurance requirement. Conventional loans may, depending on the size of your down payment and other factors, require the borrower to put as much as 20% down.
Those who do not put a certain percentage down on a conventional mortgage may be required to carry private mortgage insurance (also known as PMI).
FHA home loans, on the other hand, require a minimum 3.5% down payment and have no private mortgage insurance requirement. However, FHA mortgages do require the borrower to pay for mortgage insurance. This requirement includes an Up Front Mortgage Insurance Premium (UFMIP) and a monthly payment (MIP).
However, this may or may not be the only kind of insurance an FHA loan requires. It all depends on a few important details about the location of your new home.
Properties located in areas with known problems with natural disasters may be subject to additional insurance requirements. In some cases these may be FHA loan requirements, and in others the lender’s standards, state law, or other factors may apply.
If you want to purchase property in a known flood zone, for example, you will be required to carry flood insurance. But in some cases the borrower may have to carry hazard insurance only after the lender orders a “flood zone determination” on the property.
You read that correctly. Sometimes the problems in a specific area are well-known, while in others it may require a specific determination to know whether or not hazard insurance may be needed. This may be an issue for properties on the outskirts of a known flood zone, or an area prone to mudslides, forest fires, etc. The property may or may not be located within the boundaries of an area defined as a hazard zone or special hazard zone. That’s why the lender may need to investigate the nature of the area your chosen home is located in or near.
As you can see, there’s no one-size-fits-all answer to the question, “Do I need FHA mortgage insurance?” as all FHA borrowers are required to pay UFMIP and PMI, but where flood zones and other hazard areas are concerned, the issue is often dealt with on a case-by-case basis.