FHA mortgage insurance is charged two ways, upfront and monthly. When you compare it to conventional PMI, it is generally MUCH less expensive.
It provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default, this allows the lenders to take more risks and help more low credit borrowers buy a home or refinance.
The loans must meet certain requirements set by FHA to qualify for insurance.
Why does FHA Mortgage Insurance exist?
To help more people qualify for home loans plain and simple. The insurance is in place to pay claims on the defaulted loans that occur. If there were no insurance, lenders would lend to only those who had great credit and a lot of money down. Not everyone in this country is fortunate to have not have had any financial issues in their life. Take a look at FHA verse Conventional financing and the mortgage insurance differences here.