FHA Home Loans have two types of mortgage insurance: Up Front MIP (UFMIP) and Annual Mortgage Insurance (that is paid monthly). Because the mortgage insurance protects lenders from potential default risks, FHA home loans offer the following advantages over conventional financing:
Flexible credit guidelines
Lower down payment requirements (3.5%)
Potentially lower interest rates
The two primary disadvantages to FHA’s mortgage insurance are the cost and the mandated FHA MI Duration; therefore, if you have 5% available, we highly recommend considering a Conventional Loan to reduce the amount of MI paid.
FHA Up Front MIP of 1.75%
The FHA Up Front Mortgage Insurance Premium (UFMIP) is a necessary evil and is required for most FHA purchase home loans and most FHA refinances – the two exceptions are selected FHA Streamline Refinances and Reverse Mortgages (HECM).
The FHA UFMIP is 1.75% of the loan and is automatically added to mortgage. While the UFMIP can be paid via cash it is most commonly financed (i.e. “rolled into the loan”) to reduce the cash to close. Adding this to the loan amount does not impact the LTV for underwriting purposes – see “Base Loan Amount vs. Final Loan Amount” below.
FHA Monthly MI Factors
FHA’s Annual MIP is actually charged monthly which is why it’s commonly referred to as the “monthly MI.” FHA’s most recent changes to its MIP fees and MI Duration became effective on January 26, 2015. Some exceptions include FHA Streamlined Refinances endorsed before May 31, 2009 and Home Equity Conversion Mortgages (HECM) (aka. Reverse Mortgages). The charts below outlines the changes that were made.
Note: a basis point is 1/100 of 1%, or .01%, and the MIP calculation is based off the base loan amount. For example, if the MIP is 135 basis points on a $96,500 base loan amount, the monthly charge for the MIP is $108.56. (96,500 x .0135 / 12).
FHA Streamline Refinances
FHA streamline refinances are an exception to the recent increase in MIP. The amount of the Annual MIP for FHA streamline refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009 remain at their existing levels.
FHA MI Duration
FHA’s most recent changes to its Mortgage Insurance duration became effective on June 3, 2013 via FHA’s Mortgagee Letter 2013-04 and are applicable for most FHA loans. Note: this does not apply to Home Equity Conversion Mortgages (HECM) (aka. Reverse Mortgages). The chart below is from HUD’s Mortgagee Letter 2013-04 and it outlines the changes that were made to the duration.
Past MIP Amounts
As a reference (more for us to use when clients call and ask about their current FHA loans that we didn’t originate) here are the FHA factors from year’s past: since 2008, the FHA annual MIP schedule has been as follows, assuming a 30-year fixed-rate FHA mortgage with 3.5% down payment:
Prior to January 2008 : 0.50% annual MIP
October 2008 : 0.55% annual MIP
April 2010 : 0.55% annual MIP
October 2010 : 0.90% annual MIP
April 2011 : 1.15% annual MIP
April 2012 : 1.25% annual MIP
April 2013 : 1.35% annual MIP
January 2015 : 0.85% annual MIP
Base Loan Amount vs. Final Loan Amount
FHA home loans have a “base loan amount” and a “final loan amount” – the difference between the two is the Up Front Mortgage Insurance Premium (UFMIP). For example: a $100,000 home with a 3.5% down payment of $3,500 has a “base loan amount” of $96,500. The UFMIP of 1.75% for this loan is $1,688 ($96,500 x .0175). Because FHA allows the UFMIP to be financed into the loan, the “final loan amount” is $98,188 ($96,500 + $1,688). The Loan to Value for FHA loans is calculated off the base loan amount. In the aforementioned example the LTV is 96.5% (100% – the 3.5% down payment).
It’s also worth noting that the interest is calculated using the final loan amount while the annual mortgage insurance (MIP) is calculated on the base loan amount.