There are two types of mortgage loan insurance, and it’s also possible to avoid needing insurance. Mortgage insurance premiums (MIP) are the type of insurance required by the Federal Housing Authority (FHA). The other type is private mortgage insurance, or PMI. It’s easier to qualify for FHA loans, but private loans come with some additional benefits if you do qualify. Most notably, it’s only PMI that you can avoid; if you only qualify for an FHA loan and not a private loan, MIP can’t be ignored.
Private lenders generally have stricter credit score requirements than the FHA. In return, the higher your down payment, the lower your premium amount. Furthermore, if your down payment is at least 20%, you aren’t required to get loan insurance, so you avoid paying PMI. If you’re getting an FHA loan, you’re stuck with MIP for at least 11 years. On the bright side, the down payment amount to qualify for a reduction to 11 year MIP is 10%, not 20%.
Generally, the greater you can make your down payment, the better. Of course, paying all cash to avoid a loan at all is ideal, but not everyone can afford to do that, so keep in mind the important breakpoints. If you qualify for a private loan, putting at least 20% down is probably your best bet. Even if you only qualify for an FHA loan, be sure to put at least 10% down so that you aren’t stuck with MIP for the entire duration of the loan.
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