FHA’s flexible underwriting standards allow borrowers who may not have pristine credit or high incomes and cash savings the opportunity to become homeowners. But there’s a catch: borrowers must pay FHA mortgage insurance. This coverage protects the lender from a loss if you default on the loan. Mortgage insurance is required on most loans when borrowers put down less than 20 percent. All FHA loans require the borrower to pay two mortgage insurance premiums:

• Upfront mortgage insurance premium: 1.75 percent of the loan amount, paid when the borrower gets the loan. The premium can be rolled into the financed loan amount.
• Annual mortgage insurance premium: 0.45 percent to 1.05 percent, depending on the loan term (15 years vs. 30 years), the loan amount and the initial loan-to-value ratio, or LTV. This premium amount is divided by 12 and paid monthly.

So, if you borrow $150,000, your upfront mortgage insurance premium would be $2,625 and your annual premium would range from $675 ($56.25 per month) to $1,575 ($131.25 per month), depending on the term.

FHA mortgage insurance premiums cannot be canceled in most instances. The only way to get rid of the premiums is to refinance into a non-FHA loan or to sell your home. FHA loans tend to be popular with first-time homebuyers, as well as those with low to moderate incomes. Repeat buyers can get an FHA loan, too, as long as they use it to buy a primary residence.

FHA lenders are limited to charging no more than 3 percent to 5 percent of the loan amount in closing costs. The FHA allows home sellers, builders and lenders to pay up to 6 percent of the borrower’s closing costs, such as fees for an appraisal, credit report or title search.