The Federal Housing Administration insures residential real estate loans written by mortgage companies across the United States. Both the borrower and the home being financed must meet FHA eligibility guidelines. Borrowers pay annual insurance premiums that pay for the insurance coverage the FHA provides for lenders. The FHA insurance covers a percentage of the loan amount in the event of borrower default.
Borrowers
People seeking financing through FHA-insured loans must have credit scores of 580 or better. Applicants must have sufficient cash reserves to make a mortgage down payment of at least 3 1/2 percent as well as additional funds to cover pre-paid taxes, insurance and other closing costs. Loan applicants must have verifiable income and a debt-to-income ratio of 43 percent or less. The DTI ratio reflects the amount of the applicant's income that goes to cover debt payments, including the mortgage.
Collateral
The FHA insures loans used to buy, refinance or renovate houses. Homeowners can use FHA-insured loans to finance detached or semi-detached homes, townhomes, row houses and condominium units in complexes that meet FHA condominium eligibility guidelines. Borrowers must use the financed property as their primary residence. FHA-certified home appraisers must ensure that no safety hazards exist in financed homes and that all properties being financed have road access, sewage and water access. The FHA does not insure commercial or mulit-use properties.
Premiums
Homeowners must pay insurance premiums on a monthly basis. Typically, the mortgage payment includes the cost of the mortgage insurance as well as the homeowners insurance and property tax. On an annual basis most homeowners are required to pay an FHA insurance premium of up to 0.9 percent. The FHA also charges an upfront insurance premium that borrowers must pay at loan closing. As of 2011, the upfront premium equates to 2.25 percent of the mortgage amount.
Mortgage Insurance
Lenders requires homeowners whose mortgage exceeds more than 80 percent of their property value to pay for mortgage insurance. Federal law requires mortgage companies to discontinue mortgage insurance coverage once a borrower has at least 20 percent equity in a home. The provision requiring borrowers to drop mortgage insurance does not apply to FHA insured loans. Therefore you must continue to pay FHA insurance on an FHA backed loan until you pay off or refinance your mortgage.
