FHA Mortgage Insurance - Coverage Details

FHA mortgage insurance is mortgage insurance issued by the Federal Housing Authority, a section of US Department of Housing and Urban Development. This mortgage insurance is designed to protect lenders against losses should the borrowers default on a mortgage loan. Because FHA mortgage insurance is backed and funded by federal government, lenders can afford to give borrowers mortgage loans that they would not otherwise qualify for. While FHA mortgage insurance is easier to qualify for, borrowers should keep in mind that the program comes with a number of rules and restrictions that make it much more restrictive than most private mortgage insurance policies.

Qualifying for FHA Mortgage Insurance

In order to qualify for FHA mortgage insurance, borrowers must meet standard FHA credit qualifications. They are as follows:

  • Minimum credit score - borrowers must have the minimum credit score of 620 in order to qualify for FHA mortgage insurance. The credit score requirements will vary from lender to lender, depending on their risk tolerance. If a borrower has no credit history, he or she can provide records of paid utility bills and rents to show that they have a history of meeting their payment obligations on time.
  • Foreclosure and bankruptcy limits - borrowers will not qualify for FHA mortgage if they a bankruptcy in the past two years or a foreclosure in the past three years.
  • Tax lien payments - borrowers must have their state tax liens paid in full. If they have unpaid federal tax liens, they must demonstrate that they can pay down the debt.
  •  Employment requirements - borrowers must show that they had steady employment over the past two years with either steady or increasing income.

FHA Mortgage Insurance Payments

FHA mortgage insurance payments include an upfront premium and monthly premiums. The upfront premium is usually no more than 2.5 percent of the total value of the mortgage loan. It can be paid in either one lump sum and financed into the loan or it can be paid upfront in cash.

There are also monthly premiums due. The payments are included in the borrowers' monthly mortgage payments. The monthly payments are usually 0.55 percent of the value of the mortgage loan.

Cancelling FHA Mortgage Insurance

When borrowers back 78% of their mortgage loans, they no longer have to pay their monthly premiums. They do, however, still have to pay their upfront premium if they have any installments left at that point. The 78% figure does not take into account any extra payments or any changes to the house's appraised value. Furthermore, the borrowers must be able to demonstrate that they have paid their monthly premiums in full for five years in a row before they can be considered for cancellation. If the borrowers haven't been able to do that by they paid 78% of the mortgage loan, the cancellation will be held off until they do.