Why You Pay Those Big Fees For FHA Insurance
Forward mortgages and reverse mortgages are both FHA insured. In either case FHA plays a role throughout the marketplace.
In the forward end FHA is perceived to be a first time home buyer’s program. Ironically, reverse mortgages are considered quite the reverse and final mortgage stop.
In either case these mortgages require the payment of an upfront mortgage insurance premium. That thing is expensive and people want to know why.
When we own something many times we get insurance to cover that item against loss. So, when we pay for insurance we expect to get something for it.
So, we expect FHA insurance to act accordingly. Well, FHA insurance really isn’t for the homeowner. The home owner pays for it, but the lender gets the benefit.
The prime objective of FHA insurance is the protection of the lender.
In the case of forward mortgages it is to hedge the lender’s losses in the event of a foreclosure.
I should give a real scenario: in this scenario we should assume the mortgage to be $110,000 at foreclosure and the home value to be $100,000. Not extraordinarily unlikely.
Perhaps the property sells for less than value at the foreclosure sale. It sells for 90 thousand. Now the lender will lose at minimum 20 thousand. This is where mortgage insurance comes in.
Fha mortgage insurance works a bit differently on reverse mortgages but with the exact same outcome for the lender. Reverse mortgages are protected against more being owed on the mortgage than the home is worth.
Reverse mortgages are regularly losing equity because of the nature of the loan. Since the borrower isn’t making payments that interest is accruing at an increasing rate. The lender needs the insurance as its hedge.
Indirectly, consumers benefit by paying the high upfront mortgage insurance fee. The lender is now free to offer the consumer much more aggressive mortgages than non-FHA loans.
People will continue to complain about high fees regarding fha forward and reverse mortgages, but they get benefits they’d never receive without this mortgage insurance, in the form of light credit checks and high LTVs.
