The government-backed home loans of FHA, VA, and USDA all have some form of upfront mortgage insurance premium, or upfront MIP. Each program has a unique name for this upfront fee; however, each serves the same purpose and protects the lender.
Home Loans with Upfront MIP
Each government-backed home loan requires a one-time, upfront form of mortgage insurance. Both FHA and USDA also requires an annual amount to be collected via the monthly mortgage payment.
The term “upfront MIP” is actually FHA’s term their upfront fee. VA home loans call their fee a “funding fee,” USDA home loans call their fee a “guarantee fee.”
The amount of these upfront fees are:
- FHA’s upfront MIP is equal to 1.75% of the loan amount.
- VA ‘s funding fee varies based on a few factors.
- USDA’s up front guarantee fee is 1% of the loan amount.
The purpose of these fees is to create a reserve account for future defaults. These collected funds help pay for future losses that lenders may incur in the event that they foreclosure on a home.
These upfront fees are one-time fees that are paid at closing. In every case, the default method of payment is to roll the fee into the loan amount. This means the borrower does not need to pay for the fee out of pocket at closing.
It’s worth nothing that conventional financing offers upfront mortgage insurance options; however, there are differences between the conventional MI options and required upfront MIP for government loans.
VA Funding Fee
VA home loans are the only government loan program that allow the upfront fee to be waived if the borrower qualifies. The VA has various scenarios that determine if a borrower exempt from paying the funding fee. The DD214 will ultimately convey if the funding fee is charged at closing.
The amount of the VA funding fee being charged is determined by the following factors:
- loan purpose (i.e. purchase vs. refinance),
- first time or subsequent use of VA financing,
- loan to value (LTV).
Below are two charts that outline the various funding fee options. The first chart is for purchase home loans and the second chart is for refinances.
VA Does Not Require Monthly MI
VA home loans do not have monthly mortgage insurance.
Example of VA’s Funding Fee
Let’s assume Joe Buyer is buying a home using his VA eligibility. A home that sells for $200,000 with zero down payment means the base loan amount is $200,000. The LTV at this moment is 100% ($200,000 base loan amount divided by the $200,000 purchase price).
In this example, let’s assume Joe has never used his VA entitlement. Per the chart above, this makes the one-time funding fee 2.3%, or $4,600 ($200,000 base loan amount multiplied by 2.3%).
The final loan amount is now $204,600 after the funding fee is financed ($200,000 base loan plus the $4,600 funding fee). The final LTV is now 102.3% ($204,600 final loan amount divided by $200,000 sales price).
Remember that VA does not have a monthly MI.
USDA Guarantee Fee
The USDA guarantee fee is 1% of the loan amount. This will automatically be charged and can be rolled into the loan amount.
Because USDA home loans offer 100% financing, this means that the loan to value can be 101%. In fact, USDA allows for a maximum LTV of 103%. Because of this, up to 2% of closing costs can be rolled into the loan.
USDA Monthly MI
USDA home loans have an annual guarantee fee of .35% that is paid as part of the monthly payment. Think of this like mortgage insurance for conventional loans.
Example of USDA Guarantee Fee
Let’s assume Joe Buyer is buying a home for $200,000 with zero down payment. This means the base loan amount is $200,000. The LTV at this moment is 100% ($200,000 loan divided by the $200,000 purchase price).
The one-time upfront guarantee fee is $2,000 (or 1% of the $200,000 loan amount).
The monthly guarantee fee amount that is part of the monthly payment is $58.33 (or $200,000 loan amount multiplied by .0035 and then divided by 12 months).
FHA’s Upfront MIP
FHA home loans mandate a 1.75% upfront mortgage insurance premium. This is a mandatory fee and cannot be avoided, regardless of how much of a down payment is made.
While the default loan structure is to roll this cost into the loan, this fee can be paid at closing if desired. It is very rare for it to be paid at closing, but it is possible.
FHA Monthly PMI
FHA also requires an annual mortgage insurance premium to be collected as part of the monthly payment. The amount collected is determined by the down payment.
For FHA home loans with down payments between 3.5% and 4.99%, the mortgage insurance factor is .85%. For down payments of 5% or more, the annual factor is .80%.
This annual amount, like the upfront MIP fee, is mandatory and cannot be waived. This annual PMI also exists for the life of the loan. Unlike conventional loans that allow for MI cancellation, FHA only allows the PMI to be removed if the down payment is 10% or more. Even then, the PMI is required to be paid for 10 years before it’s removed.
Example of FHA Upfront MIP
Let’s assume Joe Buyer is buying a home for $200,000 with the FHA minimum down payment of 3.5%. This means the loan to value (LTV) is 96.5% (100% minus 3.5% down) and base loan amount is $193,000 ($200,000 * .965).
The one-time, upfront mortgage insurance premium is $3,378 (or 1.75% of the $193,000 base loan amount). This makes the final loan amount $196,378 after the upfront MIP is added to the base loan amount.
The monthly amount of mortgage insurance premium that added to the payment is $139 (or $196,378 final loan amount multiplied by .0085 and then divided by 12 months).
Loan Officer, NMLS # 729612