FHA Mortgage Insurance
FHA Home Loans have two types of mortgage insurance: Up Front MIP (UFMIP) and Annual Mortgage Insurance (that is paid monthly). FHA Home Loans require MIP regardless of LTV and this FHA MIP can be permanent for the life of the loan. FHA loans also have an FHA Up Front Funding Fee of 1.75% that can be rolled into the loan amount. Check out our FHA Payment Calculators.
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.
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.