If you opt for government-backed financing, such as the FHA loan, you are going to pay mortgage insurance. It’s not the same insurance you pay on a conventional loan, though. The mortgage insurance you pay on an FHA loan is for the life of the loan.
Luckily, there are a couple of ways around paying it for life. We show you below.
Make a Large Down Payment
The FHA only requires you to put 3.5% of the home’s purchase price down on a home. In exchange, though, you will pay mortgage insurance equal to 0.85% of the loan amount for the life of the loan. You don’t get to remove the insurance when you owe less than 80% of the home’s value, as you would do with a conventional loan.
But, a way around it is to put down at least 10% on the home. On a $200,000 home, that means $20,000. That might be a stretch, but it can help you eliminate mortgage insurance premiums after just 11 years. This would be similar to what the conventional loan would require. While it might make more sense to go for the conventional loan since you may only have to put 5% down on that loan, they are harder to get. If you don’t have great credit and a low debt ratio, you may not get the FHA loan, which is why knowing how to get around the mortgage insurance is important.
Refinance Your FHA Loan
If you can’t or didn’t put 10% down on your home bought with FHA financing, you have one more option. You can take the FHA loan for now. Once you pay the balance down enough that you owe less than 80% of the home’s value, you can refinance into a conventional loan.
Of course, in order to do this, you must be able to qualify for conventional financing. In the meantime, try to improve your credit and lower your debt ratio. Try to avoid racking up credit card debt or taking unnecessary loans. In order to have good credit you need:
- Established credit – Don’t close out any accounts that you no longer use. You need the older accounts to help you have ‘established credit.’ This is a big part of your credit score.
- Low utilization ratio – Try to keep your outstanding credit card debt at no more than 30% of your total credit card balances. This will help your credit score increase.
- Mix of credit – It’s best if you have a mix of installment loans and revolving debt. If you have all revolving debt, you pose a high risk to the lender as you have access to a large amount of funds all at once.
- Pay your bills on time – One late payment can damage your score more than you may realize. Do your best to avoid making any payments more than 30 days late.
- Don’t apply for new credit – Once you are getting close to the date that you can refinance into a conventional loan, try to avoid opening any new credit during the year leading up to it. This will help maximize your credit score.
If you wait until you owe less than 80% of the home’s value, either by paying the balance down or the home appreciates, you won’t pay mortgage insurance, assuming you qualify for conventional financing.
This is about the only way to avoid FHA mortgage insurance. Don’t forget though, you’ll pay upfront mortgage insurance on your FHA loan, which you won’t get back even when you pay the loan in full. FHA mortgage insurance helps the FHA continue to be able to write loans for moderate-income families while requiring them to make only a 3.5% down payment.Click to See the Latest Mortgage Rates»