FHA mortgages are insured by the Federal Housing Administration (FHA). They are issued by federally qualified lenders and are designed to help borrowers with high debt-to-income ratios (DTI) purchase or refinance their homes. If you default on this loan, the FHA will cover your lender’s losses, therefore mortgage insurance is required.
FHA financing can aid borrowers with bad credit, high debt-to-income ratios, or small down payments when conventional financing is not an option. With an FHA loan, you’ll be able to put as little as 3.5% down. It can be much easier to get approved for an FHA loan, as lenders have the extra benefit of their loan being insured by the federal government if you default.
With this type of financing, you’ll be required to pay for mortgage insurance, which will increase the size of your monthly payments. You’ll need to pay an upfront premium of 1.75 percent of the loan amount, due at the time of closing but typically rolled into the mortgage. You’ll also pay an annual premium that will vary, but is typically around 0.85% of the loan amount. In order to get rid of these FHA premiums in the future, you’ll have to refinance the loan or put down at least 10%.