After months of tighter lending requirements in response to the pandemic, things could finally be turning the page.
In the past month, lending requirements have loosened slightly for government loans, says Matt Speakman, an economist and mortgage expert at Zillow. This includes FHA loans, which are popular for first-time homebuyers.
Nearly 8 million single family mortgages are provided through the FHA (Federal Housing Administration), and these loans are “a great option for people who might not have a ton of credit history or a ton of money saved up for a down payment,” says Speakman.
If you can afford a 20% down payment on a home, consider a private mortgage lender (instead of a government lender) to avoid paying mortgage insurance.
But don’t forget to factor in the cost of mortgage insurance — as much as $100 to $300 per month — when deciding if an FHA loan is right for you.
FHA mortgage insurance is a requirement for anyone looking for an FHA loan, and can add significant cost to your loan payments.
What Is FHA Mortgage Insurance?
FHA insurance is designed to protect the lender against the risk of the borrower defaulting or making late payments on the loan. If the borrower defaults, the FHA will reimburse the lender for the unpaid balance of the mortgage.
“You can’t choose if you get it or not,” says Speakman. “As a borrower, it’s necessary for all FHA loans, and other government loans.”
This requirement is unique to government-backed loans. If you were to get a conventional mortgage from a private lender, requirements may differ. Usually, you aren’t required to get private mortgage insurance if you can put a 20% down payment on your home.
How Much Does FHA Mortgage Insurance Cost?
You’ll pay an upfront insurance premium of 1.75% of the loan balance when you close on your home, but you can roll that cost into your loan balance and pay it off over time.
There’s also an annual mortgage insurance premium that’s charged every year, but this can also be factored into your monthly payments. These payments are required for the life of the loan, so long as you have an FHA loan.
In total, your insurance payments will range between 0.45% and 1.05% of your loan amount each year. “For a typical $275,000 loan, you might be looking at between $100 and $300 a month,” says Speakman.
Can You Cancel FHA Mortgage Insurance?
You can’t cancel or remove FHA mortgage insurance, but you can refinance into a private loan with no insurance.
“You can refinance into a new loan and put 20% down to avoid the monthly insurance expense,” says Speakman.
Unlike FHA mortgage insurance, private mortgage insurance can be removed in a few additional ways, but reaching that 20% equity benchmark, or refinancing, are the main routes.
“[FHA loans] are a great vehicle for people to enter the housing market and take that next step to home ownership,” says Speakman. “But at a certain point, it might make sense for those people to refinance so that they can get around some of these insurance requirements, if they’re financially able to do so.”