What does FHA mortgage insurance cover?


The FHA mortgage insurance covers or protects lenders so that they do not loss out in case the buyer or the homeowners defaults on the loan.

Take note, the FHA mortgage insurance does not cover the interests of the borrower. When the borrower fails to pay for the loan and the bank starts the foreclosure proceedings, the insurance company will pay the bank but this will not be for the credit of the borrower.

In fact, there may be instances, when the insurance company will initiate a deficiency judgment against the borrower. This means that the borrower does not get away with not paying the loan.

FHA (or the Federal Housing Authority) is a government agency. It requires mortgage insurance when it closes a housing loan.

FHA currently requires an upfront premium insurance payment, which is around 1.5% of the base loan. This premium is paid in cash and may be financed by the seller, the creditor and even the buyer.

Aside from this, depending on the length of the mortgage and the amount of down payment, there will also be additional monthly mortgage insurance premiums, which is around .5% of the monthly mortgage (on a 30-year loan), or .25% of the monthly mortgage (on a 15-year loan).

Although the direct benefit of the FHA mortgage loan goes to the lender. This also benefits young home buyers who would otherwise have to wait for a long time in order to save enough for a substantial down payment.

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