Financing in Racine>Question Details

Jjohnson, Other/Just Looking in Waukesha, WI

Can someone please explain FHA's mortgage insurance works? I am looking to by a house in the fall and am wondering how large a down payment I

Asked by Jjohnson, Waukesha, WI Fri Apr 9, 2010

would need so that I do not have to pay this insurance. I heard 20%, but am not sure that is the case. Also, would I only avoid the annual insurance fee, or would I be avoiding the initial mortgage insurance premium as well? Thank you!

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Cherrie Catama-Smith’s answer
Hi JJohnson,

Even with a large down payment, you may still need to obtain an FHA loan, due to your circumstance. FHA loans require an upfront mortgage insurance premium of 2.25% of the loan amount on ALL their loans. There is absolutely no way around this. Also, if the term of the loan is 20 years or longer, you will need to pay a monthly mortgage insurance regardless of downpayment. Unfortunately there is no avoiding any of these costs unless you can be approved for any other type of loan. And YES! there are some loan programs that may be able to accommodate your situation. I hope this helps.

Cherrie Catama
Newman Realty
2 votes Thank Flag Link Fri Apr 9, 2010
BEST ANSWER
Jjohnson,

FHA insurance is COMPLETELY different than conventional mortgage insurance.

First, there isn't a down payment you can make to avoid monthly mortgage insurance on a 30 year loan for at least 5 years. You can put 50% down if you wanted, you would still pay monthly MI. If your balance is at 78% and you've paid monthly MI for at least 5 years, then the insurance comes off of your 30 year loan.

The annual premium is there regardless of your down payment or loan type.

All this sounds horrible, but there's a positive note. FHA only requires 10% down to avoid paying monthly MI, so if you're considering a 15-year loan, this is a great option. The payment is higher because it's a 15 year term, but the rate is lower and there's no MI.
1 vote Thank Flag Link Fri Apr 9, 2010
Jjohnson,

To avoid paying monthly MI, a 15 year loan is your only option. Conventional financing is out of the question with your bankruptcy.

Robin,
I believe your statement is generally true, but there are many other reasons a client may want FHA. If they don't have 5% of their own funds and are getting a gift less than 20%, they'll need FHA regardless of credit. Also, 10% down on a FHA 15 year loan doesn't require MI where a convetional does.

The reality is that conventional and FHA are completely different programs. Sometimes a client with perfect credit is better off going FHA and sometimes people with less than perfect credit scores should go conventional. I've had multiple examples of both scenarios in the last year. What's important is seeing which of the two better suit YOU.
1 vote Thank Flag Link Fri Apr 9, 2010
@Cherrie

One of the best financing answers I've seen from an agent. Did you used to be a lender?
0 votes Thank Flag Link Fri Apr 9, 2010
Hi JJohnson,

Even with a large down payment, you may still need to obtain an FHA loan, due to your circumstance. FHA loans require an upfront mortgage insurance premium of 2.25% of the loan amount on ALL their loans. There is absolutely no way around this. Also, if the term of the loan is 20 years or longer, you will need to pay a monthly mortgage insurance regardless of downpayment. Unfortunately there is no avoiding any of these costs unless you can be approved for any other type of loan. And YES! there are some loan programs that may be able to accommodate your situation. I hope this helps.

Cherrie Catama
Newman Realty
0 votes Thank Flag Link Fri Apr 9, 2010
A little more info on my situation...I was discharged from a bankruptcy in Sept 08, which is why I thought I would have to go with an FHA loan. My credit score should be 660 or higher by the time I purchase (my middle score is 641 right now).
0 votes Thank Flag Link Fri Apr 9, 2010
The only reason that you would choose to use FHA rather than conventional with 20% down is if you have a low credit score that would cause your rate to increase drastically enough that you would want to go FHA for the better rate. Then you have to figure out what would cost you more in the end.
0 votes Thank Flag Link Fri Apr 9, 2010
Hi Jjohnson,

If you're putting 20% down, you should be able to go with a conventional loan.

With FHA, regardless of the down payment, you are required to have mortgage insurance. There's the Upfront Mortgage Insurance Premium of 2.25% of the loan amount that is financed for you and then there is the monthly premium of 0.55% or 0.50% depending on the loan-to-value.

Best regards,
Elva
0 votes Thank Flag Link Fri Apr 9, 2010
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