If your mortgage loan will be financed through the Federal Housing Administration, or FHA, you have to include a mortgage insurance premium into your loan. The addition of the premium could make it more challenging to afford a home for some. If you are planning to take out a FHA loan, here is what you need to know about the premium.
What Is the Mortgage Insurance Premium?
The mortgage insurance premium, or MIP, is similar to the coverage you find with a conventional loan. It offers protection for the lenders in the event that you are not able to pay off the loan. If your home is taken in a foreclosure and sold, the insurance would cover the difference between the fair market value of the home and what the home actually sells for.
The premium is charged upfront by the FHA and is usually included in your balance. As a result, when you make payments on your mortgage each month, you are paying towards the insurance.
Is It Possible to Avoid the Insurance?
Avoiding the insurance is possible, but it will take a bigger financial commitment from you. There are several ways to do this, including putting down more on your home. The requirement for the FHA loan is based on the percentage of the mortgage owed after the down payment is paid. The percentage amount can change, so check with the FHA to determine how much more you will need to pay.
You can also choose to switch to a Veterans Affairs loan if you are eligible. As a veteran, you will not have to meet the insurance requirement. However, there are other requirements you should review with your housing counselor before signing the agreement.
Other possible options are based on specific requirements. Talk to your realtor and loan counselor for more information on which methods apply to you.
Can You Lower Your Payments?
Insurance rates are set on various factors, including your credit rating. If possible, work on improving your credit. After the first year, you can ask for a reassessment of your creditworthiness.
You can also keep tabs on what you have paid. When you have paid a certain amount on your loan, FHA is required to remove the loan from your payments. Your loan counselor can provide you with the exact amount at which this should occur. If it does not, you can contact FHA and request its removal.
Your realtor can help you explore other options for meeting the insurance requirement. The earlier you involve the realtor, the easier it will be to navigate the path to homeownership.