A FHA loan is a loan that is insured by the government, or the Federal Housing Administration.
When I pay up to 20%, does mortgage insurance fall off like it would on a conventional loan? NO
You will always, always, always pay for Mortgage Insurance on a FHA loan.
Why is this?
The reason the Federal Housing Administration was founded was to make it easier for the general public to buy homes by lowering the qualifications to get one of these loans. FHA will approve a loan if a borrower only has a FICO of 620. This is looked at as a large risk for the lender, but the government is pushing that lenders get more people into homes because it helps the market. They also only require borrowers to put 3.5% down on their home.
FHA acts as a Mortgage Insurance company for government loans. Because they don't require a high FICO score, they require that mortgage insurance is paid. In the case that a borrower defaults on the loan, FHA will pay money to the lender that is servicing the loan because the customer paid for the mortgage insurance.
The reason lenders feel comfortable lending to people with these low FICO scores is because no matter what, they are guaranteed to be paid if the customer defaults because mortgage insurance has been paid for.
Example 1: Let's say that you have a FICO of 630. You are buying a home that is worth $100,000. You are getting a gift for your down payment of $30,000. The only way you can get a loan is to get a FHA loan because you have a low FICO. However, you have a 30% down payment. Do you have to pay mortgage insurance? YES.
Example 2: You have had the home that you bought in example 1 for a while. You are wanting to refinance because you think that you can get a lower rate. You now have 60% equity in your home. Do you have to pay mortgage insurance to FHA? YES.
Moral of the story is that you will ALWAYS pay mortgage insurance on a FHA loan.
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