Home buyers in California who use an FHA loan to buy a house typically have to pay for mortgage insurance. This is just one of the requirements set forth by the Federal Housing Administration and HUD. In this article, we’ll look at the cost of FHA mortgage insurance in California and how these policies work.
The Cost of FHA Mortgage Insurance in California
The FHA loan program is built around insurance. The Federal Housing Administration offers insurance protection to mortgage lenders that participate in the program. It also requires most home buyers / borrowers to pay a mortgage insurance premium on their loans. These premiums help fund the program and are therefore an essential component that keeps it going.
There are actually two kinds of FHA mortgage insurance for California home buyers who use this program, and the overall cost can vary:
- There is an upfront premium that typically equals 1.75% of the loan amount.
- There’s also an annual mortgage insurance premium for FHA loans in California, and this cost can vary depending on the size and term of the loan. For most borrowers who make the minimum down payment of 3.5%, the annual premium equals 0.85% of the loan amount and is paid each year (typically in monthly installments).
So that’s the basic cost of FHA mortgage insurance in California. Please contact us if you have questions, or if you’d like to receive a loan estimate tailored to your specific situation.
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How It Differs from PMI
It’s also important to understand the distinction between private mortgage insurance (PMI) that is applied to conventional home loans, and the FHA insurance mentioned above. Home buyers in California who use a conventional mortgage loan that accounts for more than 80% of the home’s value usually have to pay for PMI. This is just a long-time industry requirement.
In California, the cost of PMI can vary quite a bit. Depending on the situation, borrowers might pay anywhere from 0.3% to 1.5% of the original loan amount annually, for a private mortgage insurance policy. On the other hand, borrowers who make larger down payments and keep the loan-to-value (LTV) ratio at 80% or below can generally avoid paying PMI.
How It Benefits Home Buyers in California
Thanks to the mortgage insurance industry, along with the government-backed loan programs, it’s not always necessary for home buyers to make a down payment of 20% or more. In fact, some of the mortgage programs available today allow for down payments below 5%. And the VA loan program offers 100% financing for eligible borrowers.
The upside is that FHA mortgage insurance in California, and PMI for conventional home loans, allow home buyers to purchase a home with less money down. So people don’t have to wait as long or save as much money for a down payment. All of this is made possible by mortgage insurance.
Without PMI and FHA-insured home loans, the down-payment requirements for mortgage loans in California would almost certainly go up — across the board. So while these policies might add a bit to your monthly payments, the benefits tend to outweigh the cost.