FHA Mortgage Insurance: Friend or Foe?
Are you interested in buying a home with the FHA loan program but aren’t 100% clear on what FHA mortgage insurance is or how it works? Here’s everything you need to know!
What is FHA Mortgage Insurance?
If you put less than 20% down when purchasing a home – a very common situation for first-time homebuyers – lenders need extra assurance that they’ll get their money back in case of a default. (A default is when a borrower can’t pay back the loan and the bank takes back the property.) That’s what mortgage insurance does; it protects lenders from losses if borrowers can’t repay their loans.
Here’s a little background. In the 1930s, the Roosevelt administration hatched a plan to boost the sluggish economy by implementing a government-backed insurance pool that would lower the barriers to entry to home ownership. The biggest challenge, for would-be homebuyers, was saving up enough for a down payment. Thus, the Federal Housing Administration (FHA), a subsidiary of HUD, began their mortgage insurance program which allowed borrowers a way to buy a home with less money down.
Note: FHA doesn’t lend money. Instead, the agency operates an insurance pool that gives lenders the confidence to make more loans to people. When you pay FHA mortgage insurance, it is paid to the FHA.
Mortgage insurance is the norm among government mortgage programs including USDA, conventional and VA loans. Conventional (non-government backed) loan programs like Conventional 97 and HomeReady are similar. They, too, require mortgage insurance. But, in the case of conventional programs, the backing comes from private mortgage insurance (PMI) companies instead of government agencies.
The good news is that borrowers can buy a home with less money down, regardless of the type of mortgage program that they chose. In the case of FHA loans, you can acquire a home with as little as 3.5% down. But that’s the rub. If you use the FHA loan program, you’ll pay mortgage insurance for the privilege.
Two Kinds of FHA Mortgage Insurance
To get a handle on how FHA mortgage insurance works, you will find it helpful to know a couple of terms. There are two kinds of insurance used for FHA loan transactions. Neither one is affected by your credit score.
Upfront Mortgage Insurance Premium (UFMIP)
UFMIP is a one-time fee paid at closing. If you don’t have enough cash to pay the upfront fees, FHA guidelines allow you to finance it into the loan amount, thus reducing your out-of-pocket expenses.
Annual Mortgage Insurance Premium (MIP)
MIP (and its conventional loan counterpart PMI) is calculated annually, then broken up and paid monthly along with the principal and interest portion of your mortgage payment. MIP is paid over the lifetime of the loan.
After a few years of owning your home and paying down the principal balance, you’ll eventually reach a point where the loan-to-value (LTV) reaches 80%. But FHA mortgage insurance doesn’t go away on its own. Getting rid of mortgage insurance requires paying off the loan by refinancing into a new mortgage or selling the home.
FHA Mortgage Insurance Rates
FHA Upfront Mortgage Insurance Premium (UFMIP) Example:
Upfront FHA mortgage insurance is 1.75% of the loan amount. Pretty straightforward.
- $300,000 purchase price – 3.5% down payment ($10,500) = $289,500 FHA base loan amount
- $289,500 FHA base loan amount x 1.75% = $5,066.25 FHA UFMIP
FHA Annual Mortgage Insurance Premium (MIP) Example:
Annual FHA mortgage insurance premiums (MIP) scale up and down based on your situation. You can catch a break on the percentages depending upon the loan term (number of years over which the loan is repaid, the loan amount and the resulting loan-to-value after your down payment is applied.
The annual MIP charts apply to purchase transactions, streamline refinances, no cash-out refinances and cash-out refinances.
FHA Annual Mortgage Insurance Premiums for Terms > 15 Years
|Base Loan Amount||LTV||Annual MIP|
|≤ $625,500||≤ 95%||80 bps (0.80%)|
|≤ $625,500||> 95%||80 bps (0.80%)|
|>$625,500||≤ 95%||100 bps (1.00%)|
|> $625,500||> 95%||105 bps (1.05%)|
FHA Annual Mortgage Insurance Premiums for Terms <= 15 Years
|Base Loan Amount||LTV||Annual MIP|
|≤ $625,500||≤ 90%||45 bps (0.45%)|
|≤ $625,500||> 90%||75 bps (0.75%)|
|> $625,500||≤ 78%||25 bps (0.25%)|
|> $625,500||78.01% to 90%||70 bps (0.70%)|
|> $625,500||> 95%||95 bps (0.95%)|
Continuing with the example loan amount, and using the chart above, we can figure out how much you’ll pay each month for the annual FHA mortgage insurance premium.
- 30-year fixed mortgage
- FHA base loan amount of $289,500 x annual fee (chart above) .80% = $2,316
- $2,316 ÷ 12 months = $193 monthly FHA mortgage insurance
Final Thoughts on FHA Mortgage Insurance
If you have a down payment less than 20% of the purchase price of a home, FHA loans provide a time-tested way to acquire a property. With a down payment as small as 3.5%, you could be in position to be a homeowner. In this regard, FHA loans represent a tremendous opportunity for you.
Just be sure that you understand that the very tool that enables you to buy a home, FHA mortgage insurance, comes at a price. Many homeowners have decided it’s the right move for them. In fact, millions of homeowners since 1934 have taken advantage of this government-backed insurance program and are happier for it.