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FHA Loan Homeowners Insurance Requirements

FHA Loans & Home Insurance

FHA Loan Homeowners Insurance Requirements

You may be wondering, if you have a Federal Housing Administration or FHA loan, what your homeowners insurance requirements are. Homeowners insurance is usually a lender requirement, but the FHA loan program has specific insurance requirements for both the borrower and the lender. To understand the requirements you must meet as a homeowner with an FHA loan, you must understand how FHA loans work and how they are repaid.

How FHA Loans Work

First, it is important to know that the FHA protects the mortgage lender, not the borrower or the homeowner, in this case. Like other home loans, the Federal Housing Administration does not loan money directly to the home buyer, the funding comes from a private mortgage lender and the FHA insures the loan against default, protecting the lender. 

If the homeowner fails to repay the loan or defaults, the government partially covers the lender’s losses. In order for the lender to be covered by the government, they must first be approved and ensure that all loans meet the Federal Housing Administration’s and U.S. Department of Housing and Urban Development’s requirements. The FHA loan program is really more like an insurance company funded by borrowers or homeowners who repay the coverage in the form of mortgage insurance premiums. Because of this, there are very specific requirements and payments that homeowners who have an FHA loan must meet.

FHA Mortgage Insurance and Premiums

Mortgage insurance exists to pay the lender in the event of a foreclosure, not to protect the homeowner. There are usually two different types of mortgage insurance premiums that the homeowner must pay. The first is an upfront premium that is usually equal to 1.75% of the loan amount and is typically paid when the homeowner closes on the house. The second is an annual premium that can range for homeowners, but in most cases is usually 0.85% for most homeowners. 

Rates can be affected by the homeowner’s down payment on the property and the Federal Housing Administration’s loan to value ratio. All homeowners who utilize the FHA loan program are required to pay mortgage insurance premiums. Both mortgage insurance premiums can be paid off over time as a part of the monthly mortgage payment. 

Homeowners Insurance Requirements and FHA Loans

Homeowners insurance is required by the lender whether you use a FHA loan or not. It covers property damage from natural disasters, accidents, fire or theft, so it’s a good thing to have in addition to being required by your lender. 

Often the homeowners insurance requirements are detailed by the mortgage lender when it comes to FHA loans. The amount of coverage varies from lender to lender, but many require that the home be insured for at least the amount of the loan. Many lenders also require FHA borrowers to have a homeowners insurance policy before closing on a house. 

Remember, when you signed your mortgage contract, you agreed to maintain a specific amount of coverage on your home and property. If you do not keep your homeowners insurance policy, it is a default on your mortgage contract. 

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