Which loan type requires mortgage insurance?

A Federal Housing Administration (FHA) loan is designed to help first-time homebuyers and those with lower credit scores access mortgage financing. One of the key characteristics of FHA loans is that they require mortgage insurance. This insurance provides protection to the lender in the event that the borrower defaults on the loan. Since FHA loans are often used by borrowers with lower down payments—typically as low as 3.5%—the mortgage insurance requirement is a way to mitigate the increased risk to lenders.

Mortgage insurance with FHA loans consists of two components: an upfront mortgage insurance premium (UFMIP) paid at closing and an ongoing monthly insurance premium (MIP). This ensures that even if the borrower has a lower down payment, the lender has some assurance that they will not suffer complete losses if the borrower defaults.

In contrast, conventional loans may not require mortgage insurance if the down payment is 20% or more, VA loans generally do not require mortgage insurance as they are backed by the Department of Veterans Affairs, and purchase money mortgages can vary widely depending on the lender and specific loan terms. Thus, the necessity of mortgage insurance specifically defines FHA loans as a unique option for many buyers.