One of the costs with an FHA mortgage is the mortgage insurance premium (MIP). The FHA mortgage insurance premium is used to support the FHA home loan program. Every home buyer (or a homeowner who is refinancing) pays an upfront cost. The FHA premium has changed over the years. You can see the cost of the FHA mortgage insurance premium over the years with this link - FHA mortgage insurance & funding fee.
The FHA does not lend money directly to the borrower but works with approved lenders. The mortgage lenders must follow the generous FHA lending guidelines. Needless to say, some homeowners fall into foreclosure. The FHA reimburses the lender a percentage of the loss. The reimbursement is provided by the mortgage insurance premiums that all borrowers pay. After the foreclosure proceedings, the Federal Housing Administration (FHA) takes title to the home and offers the foreclosed home for sale. The FHA foreclosures are often called HUD houses.
The mortgage insurance is either financed with the loan amount or paid in cash. The mortgage insurance is also called the FHA funding fee, because that is the purpose of the cost.
How is mortgage insurance calculated on a FHA loan?
Currently, the upfront FHA funding fee is 1.75% of the "base" mortgage.
|30-year FHA upfront mortgage insurance example|
|1. Sales price||$ 200,000|
|2. Less down payment (3.5%)||$ 7,000|
|3. Base mortgage =||$ 193,000|
|4. Funding fee percentage||X 1.75%|
|5. Funding fee cost||$3,377.50|
It should be noted that there are maximum lending limits with the FHA loan. An additional down payment is required when the "base" mortgage exceeds the lending limit for the US county where the home is located. Loans that exceed the lending limit are called jumbo FHA mortgages.
Calculating FHA monthly mortgage insurance
In addition to the upfront FHA premium, the FHA also charges a monthly mortgage insurance cost (MIP). The monthly cost is often referred to as PMI. Unlike the one cost fits all for home buyers, the monthly cost changes based on the down payment or equity in the case of a refinance, loan amount, and the length of the mortgage term.
Here's how the monthly mortgage insurance is calculated
|30-year FHA monthly mortgage insurance example|
|Sales price||$ 200,000|
|Less down payment||$ 7,000|
|Base mortgage =||$ 193,000|
|Base mortgage||Monthly MIP Percentage||Annual MIP Cost||Divided by 12 months||Monthly Cost|
|$ 193,000||X||.85%||=||$ 1,544.00||/ =||$ 136.71|
Frequently Asked Questions About FHA Mortgage Insurance
Q. Can you get an FHA loan without mortgage insurance?
A. Unfortunately, all FHA home loans require upfront mortgage insurance and an annual mortgage insurance premium that is collected with your monthly loan payment.
Q. Do all FHA loans have the same interest rate?
A. The interest rate on FHA loans change daily (sometimes hourly) and will vary between lenders. There is no universal interest rate for FHA mortgages.
Q. Do credit scores affect the FHA interest rate?
A. Surprisingly, the FHA does not usecredit scores to affect the interest rate. That's a real plus for credit challenged home buyers and homeowners who wish to refinance their current mortgage.
Q. Does the FHA mortgage insurance go down each year?
A. Yes, because the monthly mortgage insurance cost is calculated on the loan balance.
Q. How do I get rid of FHA mortgage insurance without refinancing?
A. You can request a cancellation of your FHA mortgage insurance when you meet certain requirements:
- If you have a 30-year loan and the loan is in good standing
- and If your mortgage loan closed prior to June 3, 2013,
- and you paid your loan for 5 years,
- and your loan balance is at or below 78% of the last FHA appraised value (usually the original purchase price).
- If you have a 15-year loan, there's no 5-year minimum.
Q. How do I get rid of FHA mortgage insurance?
A. If your FHA mortgage closed after June 3, 2013, your only option is a mortgage refinance.
Q. How long does mortgage insurance stay on FHA loan?
A. If the loan closed after June 3, 2013, it will never fall off.
Q. How much is FHA mortgage insurance a month?
A. The cost is determined by the loan amount, term, and down payment (or equity if refinancing)
Q. How much is the FHA upfront mortgage insurance premium?
A. The upfront FHA funding fee is 1.75% of the base mortgage. The monthly mortgage cost which is based on down payment/equity, loan amount & mortgage term
Q. Is it better to get a conventional loan or FHA?
A. The conventional loans do not require upfront mortgage insurance and monthly mortgage insurance with a 20% down payment or equity. But, they are tougher than FHA loans.
Q. Is it hard to qualify for an FHA loan?
A. FHA loans are the easiest way to finance a home.
Q. Is PMI higher on FHA loans?
A. FHA monthly PMI (called MIP) is cheaper than conventional private mortgage insurance.
Q. Is there a 15-year FHA loan?
Q. Should I refinance to get rid of the FHA PMI?
A. Take a look at all costs. Will the interest rate be reduced? How much will it cost to refinance? Ask your loan officer to calculate the new mortgage payment under a refinance.
Q. What is FHA mortgage insurance for?
A. The FHA (HUD) uses the mortgage insurance premiums to reimburse the lenders who were forced to foreclose on delinquent homeowners.
Q. What is the income limit for an FHA loan?
A. There is no income limit with FHA loans.