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The FHA guarantees mortgages. This means that the agency will repay the lender if the borrower defaults on the loan, thus encouraging lenders to make loans to people who cannot afford a large down payment.
The FHA charges borrowers mortgage insurance premiums in order to build a cash reserve to repay lenders if the borrower defaults.
The FHA charges two types of mortgage insurance premiums: a large, one-time payment at the start of the loan and monthly premiums that typically continue to be charged until you reach 22 percent equity in your home.
The one-time payment equals 2.25 percent of the loan's value and is due at the start of the loan. The FHA allows this payment to be lumped into the mortgage. The size of this payment increased from 1.75 percent in 2010.
The cost of the monthly premiums is about 0.04 percent per month of the outstanding value of the loan. The precise amount varies from loan to loan, based on the borrower's creditworthiness.
CNN Money: FHA Loan Requirements Will Make it Harder to Get a Mortgage
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