The type of mortgage that we acquired when buying our first property is important. Being approved for a home loan, commonly known as an FHA, does not have the same financial consequences as for a conventional loan.
The difference is not only in the initial payment, since in the current market you can buy a conventional loan with a downpayment lower than the FHA.
To get to the answer, let’s go by parts, as Jack the Ripper says.
The FHA loan is underwritten by the Federal Housing Administration (FHA). This means that if the buyer, for some reason, cannot continue paying their mortgage and the sale of the property does not cover the debt, the government, through the FHA, will compensate the lender for the loss. In some countries people lose property and yet they have to keep paying off the loan until it is paid off. In the US this is not the case, but that government favor does not come free, instead, it requires that you be paid a mortgage insurance called Mortgage Insurance Premium, MIP.
On the other hand, conventional loans are not backed by the government. This is why lenders accept those with a good credit score and a stable income. And for those who pay less than 20% downpayment, lenders make it a condition that they purchase private mortgage insurance (PMI).
You will say, then, it is the same. Well, no. Although in both mortgage loans the buyer has to pay mortgage insurance, MIP in the case of an FHA and PMI in the conventional one, there is a big difference.
Let’s illustrate with numbers
Suppose we have to pay $ 200 a month for mortgage insurance. About $ 2,400 would be disbursed in one year. WOW, that’s money!
The good news is that, in the case of a conventional loan, the owner can stop paying such insurance, when they have reached 20% of the principal principal of their mortgage. That is why conventional mortgages, where the downpayment is greater than 20%, do not need PMI insurance.
However, if someone buys through an FHA mortgage, the mortgage insurance will last for the life of the loan. Although, if we are rigorous, in the land of possibilities there is also a way to remove it.
If you want to know how this is done, call our specialists, who will be happy to explain which home insurance is best for you to guarantee the financial stability of your family AND also how to eliminate the insurance on your mortgage.