FHA Mortgage Insurance Premium is an important part of every FHA loan.
There are two types of Mortgage Insurance Premiums associated with FHA loans:
1. Up Front Mortgage Insurance Premium (UFMIP) - financed into the total loan amount at the initial time of funding
2. Annual Mortgage Insurance Premium - an annual mortgage insurance premium that is divided into monthly payments made along with your principal, interest, taxes, and Insurance
Conventional loans that have a Loan-to-Value over 80% may also require mortgage insurance premiums but this mortgage insurance is private so therefore called PMI. The mortgage insurance premiums for conventional loans are calculated off the borrower's loan to value, qualifying FICO score, loan purpose, and occupancy. These premiums can often be much more than the MIP set by FHA depending on the scenario.
Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition.
Without FHA around to ensure the lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.
Calculating FHA Mortgage Insurance Premiums
Up Front Mortgage Insurance Premium (UFMIP)
UFMIP varies based on the term of the loan and Loan-to-Value.
For most FHA loans, the UFMIP is equal to 1.75% of the base FHA loan amount except for a few exceptions like streamline or simple refinances, and a few other niche HUD FHA programs.
- If John purchases a home for $100,000 with 3.5% down, his base FHA loan amount would be $96,500
- The UFMIP of 1.75% is multiplied by $96,500, equaling $1,688.75
- This amount is added to the base loan, for a total FHA loan of $98,188.00. The additional $.75 is paid at closing.
Annual Mortgage Insurance Premium (MIP)
- Equal to .55% of the loan amount divided by 12 - when the Loan-to-Value is greater than 95% and the term is greater than 15 years
- Equal to .50% of the loan amount divided by 12 - when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years
- Equal to .25% of the loan amount divided by 12 - when the Loan-to-Value is between 80% - 90%, and the term is greater than 15 years
- No MMI when the loan to value is less than 90% on a 15-year term
The annual mortgage insurance premium is not a permanent part of the loan, and it will drop off over time.
For mortgages with terms greater than 15 years, the MIPI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.
For mortgages with terms 15 years or less and a Loan-to-Value loan to value ratios 90% or greater, the annual mortgage insurance premium will be canceled when the loan to value reaches 78%. *There is not a 5-year requirement like there is for longer-term loans.