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How Does FHA Mortgage Insurance Work? Why Do We Even Have It?

How Does FHA Mortgage Insurance Work?

At a time when lenders are scrutinizing new loan applications more than ever before, it is comforting to see that the Federal Housing Authority (FHA ) is still providing affordable loans to many homebuyers.  One question that is often asked of new homeowners concerns mortgage insurance.  People want to know how it works and if it is necessary.

Mortgage insurance is a type of insurance for the loan.  Just as home insurance will repay the owner in the event of damage or loss, the mortgage insurance covers the loan balance in the event the borrower is not able to make the payments.  The process is as follows:

  • Lender approves loan for borrower according to FHA rules and guidelines
  • Borrower agrees to make mortgage payments
  • In addition, borrower agrees

    to pay mortgage insurance premiums

  • FHA protects the lender if the loan is not repaid.

Why It is Necessary

The use of mortgage insurance lessens the risk for the lenders.  As long as the FHA rules are followed for the approval of the loan the lender receives assurance that their money will be recovered.  This allows lenders to make more loans and therefore provide more opportunities to numerous young buyers.

Besides providing a way for young and first time home buyers a way to purchase a home it also lowers the costs over traditional loans.  The mortgage insurance required for an FHA loan is generally much cheaper than the mortgage insurance required for conventional loans.  Along with competitive interest rates, the less expensive mortgage insurance make these loans very attractive to people shopping for their first home.

Category: Credit

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