November 16, 2010
On the surface, FHA mortgage insurance seems designed mainly to protect the lender’s interest. FHA mortgage insurance is designed to mitigate the bank’s losses in case the FHA loan goes into default and foreclosure. But this insurance does more than just protect the FHA lender–it also helps the buyer.
The Housing and Economic Recovery Act of 2008 requires FHA mortgage insurance on all new FHA mortgages. The FHA loan applicant must, once approved, pay for this insurance–costs that include an up-front mortgage insurance premium and monthly insurance payments along with the mortgage. The fees and terms of FHA mortgage insurance depends on what kind of FHA loan the borrower wants. Other factors include the length of the loan term, and loan amount to property value ratio.
While FHA loan insurance protects the lender–no money goes to the buyer if the insurance policy is needed–it does benefit an FHA loan applicant in several ways. Loan insurance makes the borrower a better risk, and lenders are more willing to offer a home loan to someone they know won’t cost them much even in a worst case situation. Qualifying for an FHA home loan is easier than qualifying for a conventional loan; FHA mortgage insurance is one of the reasons.
It’s also the reason why FHA loan interest rates can be competitive with conventional loan interest rates–as the FHA official site says, the government insures the loan, so the lender can afford to offer a more competitive rate even to those with credit that might not qualify for that lower rate on the conventional market.
FHA mortgage insurance protects the lender and makes the borrower more attractive for a home loan. While it’s true that the premiums and the up front mortgage insurance premiums are additional expenses the borrower must contend with, the insurance is what makes the loan possible at the rates and terms it’s offered for as guaranteed by the FHA.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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