Part of what the Federal Housing Administration does is issue insurance on mortgage loans. This protects the lender incase the borrower defaults. This will improve the terms of your loan whether you have good or poor credit history. Part of the FHA’s mission is to help people achieve their goals in regards to home ownership. They want everyone to be able to own a home without paying outrageous mortgage interest rates and fees.

There are private companies that offer this type of insurance, however their guidelines are stricter when in comes to who qualifies, and if you qualify, private issuers will have a higher down payment requirement than the FHA. The FHA will generally lower the amount you need to make as a down payment. Since the loan is government insured, the lender is no longer taking on all the risk. The FHA mortgage loan insurance is transferable. If you decide to sell your home, the new homeowner can pay the rest of the mortgage according to the original loan terms.

The buyer can pay you what you’ve already paid on the loan, or more depending on what you want to sell your home for. Or the buyer can simply borrow the whole amount of the home and pay it off on the original terms. The lender pays for the mortgage insurance, but the cost is passed onto you with a slight increase in interest rates. According to the Homeowners Protection Act of 1998 you can cancel you mortgage loan insurance if:

1. The ratio of your home’s actual principal balance of the loan to your home’s original value equals 80%.

2. The ratio of the principal balance (Based on your loan’s amortization – the yearly depreciation/appreciation of the value of your home) to your home’s original value equals 78%. Private insurers will cancel the insurance at this point without you requesting it.

Cancellation rights are upheld if you have a good payment history and the value of your home has not depreciated.