FHA Mortgage Insurance: Explained

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Mortgages with the Federal Housing Administration (FHA) can be especially attractive to credit-challenged first-time homebuyers. Not only can your down payment be as little as 3.5 percent, but FHA loans also have more lenient credit requirements. Indeed, you can qualify for maximum funding and that low percentage rate with a minimum credit score of 580.

On the negative side, the generous qualifying requirements increase the risk to a lender. That’s where mortgage insurance comes into play.

FHA mortgage insurance (MIP) backs up lenders if you default. It’s the price you pay for getting a mortgage with easier underwriting standards. If you put down 10 percent or more, you’ll pay MIP for 11 years. If you put down less than 10 percent, you’ll pay for MIP for the life of the loan. But there are ways you can get MIP removed or canceled, which we’ll also explain in a bit.

MIP can be bit confusing, so we’ll break down exactly how it works and how much it can add to the cost of a mortgage loan in this post.

Upfront and ongoing MIP: Explained

All FHA borrowers have to pay for mortgage insurance.

MIP is paid upfront, when you close your mortgage loan, as well as through an annual payment that is divided into monthly installments. Not all homebuyers have to pay MIP forever, and we’ll get into those specifics, so hang tight.

When you make your upfront MIP payment, the lender will put those funds into an escrow account and keep them there. If you default, those funds will be used to pay off the lender. As for your ongoing MIP payments, they get tacked onto your monthly mortgage loan payment.

How long you have to pay MIP as part of your mortgage payments can vary based on when the loan was closed, your loan-to-value (LTV) ratio, and the size of your down payment. Your LTV is simply how much your loan balance is, versus the value of your home, which our parent company LendingTree explains in this post.

Upfront Mortgage Insurance Premium (UFMIP)

UFMIP is required to be paid upon closing. It can be paid entirely with cash or rolled into the total amount of the loan. The lender will send the fee to the FHA. The current upfront premium is 1.75 percent of the base loan amount. So, if you borrow a FHA loan valued at $200,000, your upfront mortgage insurance payment would be $3,500 due at closing.

UFMIP is required to be paid by the FHA lender within 10 days of closing. The payment is included in your closing costs or rolled into the loan. A one-time late charge of 4 percent will be levied on all premiums that aren’t paid by lenders within 10 days beyond closing. The lender (not the borrower) must pay the late fee before FHA will endorse the mortgage for insurance.

With ongoing premiums, your lender will collect your MIP and send it to HUD. The lender, not you, be penalized for any late MIP payments.

Annual MIP payments are calculated by loan amount, LTV, and term. To help estimate your cost, the FHA has a great What’s My Payment tool.

Here’s an example of monthly charges based on a $300,000, 30-year loan at 4 percent interest, with a 3.5 percent down payment and an FHA MIP of 0.85 percent. (This does not include any money escrowed for taxes and insurance):

  • Principal and interest: $1,406.30
  • Down payment: $10,500
  • Upfront MIP at 1.75 percent: $5,066
  • Monthly FHA MIP at 0.85 percent: $203.42
  • Total monthly payment = $1,609.72

Penalties and interest charges for late monthly payments are similar to those levied on the UFMIP.

Base Loan Amount

LTV

Annual MIP

Less than or equal to $625,500

≤ 90.00%

0.80%

> 90.00% but
≤ 95.00%

0.80%

> 95.00%

0.85%

Greater than $625,500

≤ 90.00%

1.00%

> 90.00% but
≤ 95.00%

1.00%

> 95.00%

1.00%

Source: HUD

Base Loan Amount

LTV

Annual MIP

Less than or equal to $625,500

≤ 90.00%

0.45%

> 90.00% but
≤ 95.00%

0.70%

Greater than $625,500

> 90.00% but
≤ 95.00%

0.45%

> 95.00%

0.70%

> 90.00%

0.95%

Source: HUD

How long does MIP last?

The length on MIP requirements also depends on when you closed the loan and the size of your down payment. The rules changed dramatically in July 3, 2013. Until then, you could cancel your MIP after your LTV ratio dropped to 78 percent. Under the new rules, the MIP on loans closed after June 3, 2013, will last either the life of the loan or for 11 years, based on the amount of the down payment.

For loans that were closed before June 3, 2013, you can still request that MIP be dropped after your LTV ratio drops to 78 percent — after five years of payments without delinquencies.

Here’s the breakdown:

Loan Term

Original Down Payment

MIP Duration

20, 25, 30 years

Less than 10%

Life of loan

20, 25, 30 years

More than 10%

11 years

15 years or less

Less than 10%

Life of loan

15 years or less

More than 10%

11 years

Source: FHA

 

Loan Term

Original Down Payment

MIP Duration

20, 25, 30 years

Less than 10%

78% LTV based on original purchase price
(5 years minimum)

20, 25, 30 years

10-22%

78% LTV based on original purchase price
(5 years minimum)

20, 25, 30 years

More than 22%

5 years

15 years

Less than 10%

78% LTV

15 years

10-22%

78% LTV

15 years

More than 22%

No MIP

Source: FHA

How to Eliminate MIP

NOTE: About endorsements

According to the MIP Refund Center, the HUD endorsement on FHA loan is the date your MIP is approved. When you pay your upfront MIP with the lender, the loan is closed.The clock starts ticking on your MIP on the endorsement date.

More on MIP cancellation:

Most of today’s FHA borrowers will have but a few options to end their insurance payments. If you’re hoping to get out of paying FHA mortgage insurance, you’re going to either have to pay off the loan or do some refinancing. The FHA policy allowing borrowers to cancel annual MIP after paying for five years and reaching 78 percent LTV was rescinded with the new regulations in 2013 requiring payments for the life of the loan.

The good news about the FHA policy is that you can retire your loan earlier by making additional payments. If you closed your loan after June 2013, you can cancel MIP by refinancing into a conventional loan once you have an LTV of at least 80 percent.

Here are two strategies to get your MIP canceled:

Replace/refinance with a Streamline FHA Mortgage

If you have a current FHA mortgage and have no late payments, you may qualify for a Streamline FHA mortgage to refinance your existing loan with a better rate. You’ll still need to pay MIP but the savings generated by the lower interest rate can offset your insurance costs.

Replace/refinance, with conventional PMI

Want to switch to conventional refinancing? Credit requirements are tougher and interest rates may be higher on conventional PMI. The minimum qualifying credit score for conventional fixed-rate loans is 620.

PMI is similar to MIP in that both protect the lender’s investment. The MIP is determined by the LTV and term. The PMI is calculated on the size of your down payment.

A minimum of 5 percent down is required and the PMI can be paid in a lump sum or monthly installments — not both. If you put down 20 percent or more, the requirement for PMI on conventional financing can be waived. In conventional refinancing, you may be required to have an appraisal to determine property value. This is essential since the PMI insurance requirement on conventional loans ends once the borrower’s LTV drops to 78 percent. The Consumer Financial Protection Bureau says that the lender is required to cancel PMI once your payments reach the “midpoint of your loan’s amortization schedule” — no matter the LTV. That’s if you’re current on your payments.

A good way to determine the value of refinancing is to complete an analysis through LendingTree’s Refinance Calculator.

LEARN MORE:

FHA announcements and changes

HUD announces changes in MIP requirements from time to time in reaction to risks such as foreclosures, deficits in the Mortgage Insurance Fund or downturns in FHA lending.

For example, in January 2015, HUD reduced the annual MIP insurance rate by 50 basis points. Another announcement was released this year after President Trump took office when HUD canceled a plan to lower MIP premiums proposed by the Obama administration. According to the National Association of Realtors, the cancellation of lower rates means “roughly 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers will be left on the sidelines in 2017 without the cut.”

Consumers should check with lenders or with HUD to stay up to speed on changes that could affect their mortgage.

Am I eligible for a HUD refund?

If you acquired your loan prior to Sept. 1, 1983, you may be eligible for a refund on a portion of your UFMIP. Or, if you refinance your home with another FHA loan, the insurance refund is applied to your new loan.

HUD rules specify how long you have to refinance before you lose your refund:

  • For any FHA-insured loans with a closing date prior to Jan. 1, 2001, and endorsed before Dec. 8, 2004, no refund is due the homeowner after the end of the seventh year of insurance.
  • For any FHA-insured loans closed on or after Jan. 1, 2001 and endorsed before Dec. 8, 2004, no refund is due the homeowner after the fifth year of insurance.
  • For FHA-insured loans endorsed on or after Dec. 8, 2004, no refund is due the homeowner unless he or she refinanced to a new FHA-insured loan, and no refund is due these homeowners after the third year of insurance.

The refund process goes into motion when the mortgage company reports the termination of your insurance on the loan to HUD. You may receive additional paperwork from HUD or receive a refund directly in the mail. You can find out if you’re owed a refund by entering your information at the HUD refund site. If you’re on the list, call HUD to get the ball rolling at: 1-800-697-6967?.???

Final thoughts

If you’re trying to get into a home with less-than-optimal credit, an FHA-backed loan could be your best option. You’ll pay for the benefit of landing the mortgage through MIP over much of the loan’s lifetime, if not all of it. You may save money after you’ve built some equity (or improved your credit) by refinancing to a conventional mortgage that drops the mortgage insurance requirement after you reach the 78 percent LTV milestone.

The post FHA Mortgage Insurance: Explained appeared first on MagnifyMoney.

Mortgage Insurance Explained: What It Is and Why You Should Have It


There’s a lot to consider when purchasing a home. Location, size, and cost spring to mind as three of the most important factors. Perhaps you’ve budgeted and figured out how much you can afford for a down payment, but have you also considered your total monthly mortgage payments?

If you’re applying for a mortgage and can’t afford to put at least 20% down, you may have to pay for mortgage insurance.

What is mortgage insurance?

Mortgage insurance helps protect the lender’s investment, not the homeowner.

A homeowner’s insurance policy may reimburse you for a variety of expenses, including vandalism, thefts, and environmental damage to your home. Mortgage insurance is a bit different. Although you are responsible for mortgage insurance premiums, the policy protects the lender.

Casey Fleming, mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage,” explains mortgage insurance “insures the lender against principal loss in the event you default, they foreclose, and the foreclosure sale doesn’t bring in enough money to cover what they’ve lent you.” In short, if you don’t pay your bills, the insurance company will help make the lender whole.

The 20% down payment rule

Mortgage insurance isn’t required for all homebuyers. “Typically, homebuyers looking to get a conventional mortgage must pay PMI if they are making a down payment of less than 20%,” says Josh Brown of the Ark Law Group in Bellevue, Wash., which specializes in bankruptcy and foreclosures. Brown points out PMI serves a valuable function by allowing otherwise qualified homebuyers (with an acceptable debt-to-income ratio and credit score) to be approved for a conventional loan without the need for a large down payment.

How to find mortgage insurance

Mortgage lenders will often find a PMI policy for you and package it with your mortgage. You will have a chance to review your PMI premiums on your Loan Estimate and Closing Disclosure forms before signing paperwork and agreeing to the mortgage.

Types of mortgage insurance

There are two main types of mortgage insurance: Private mortgage insurance (PMI) and mortgage insurance premium (MIP).

PMI helps protect lenders that issue conventional, Fannie Mae and Freddie Mac-backed, mortgages. You’ll often be required to make monthly PMI payments, a large upfront payment at closing, or a combination of the two. These payments are made to a private insurance company and are required unless you have at least 20% equity in your home. You may request to cancel your PMI once you have paid down the principal balance of your home to below 80% of the original value.

Mortgages issued through the Federal Housing Administration (FHA) loan program also require mortgage insurance in the form of a mortgage insurance premium (MIP). You will be required to pay an upfront fee at closing and an MIP every month as part of your monthly mortgage payment. Your MIPs depend on when your mortgage was finalized and your total down payment.

How much mortgage insurance will cost you

Protect Your House

PMI premiums can vary depending on the insurer, your loan terms, your credit score, and your down payment. The premiums often range from $30 to $70 per month for every $100,000 you have borrowed, according to Zillow.

Many homeowners’ monthly mortgage payments include their PMI premium. Alternatively, you might be able to make a one-time upfront PMI payment. Or, you could make a smaller upfront payment and monthly payments.

As we mentioned earlier, for an FHA loan, you will have to pay upfront mortgage insurance premium (UFMIP) which is generally 1.75% of your loan’s value. You may have the option of rolling this premium payment into your mortgage and pay it off over time. Your MIP depends on your down payment, the base loan amount, and the term of the mortgage and can range from .45% to 1.05% of the loan’s value. The MIPs must be paid monthly.

Mortgage insurance doesn’t have to be forever

There are a few situations when you may be able to stop making mortgage insurance premium payments.

There are two eligibility requirements for conventional mortgages closed after July 29, 1999. As long as you’re current on your payments, PMI will be terminated:

  • On the date when your loan-to-value is scheduled to fall below 78% of the home’s original value.
  • When you’re halfway through your loan’s amortization schedule; 15 years into a 30-year mortgage, for example.

Your home’s original value is often the lower of the purchase price or appraised value. The current value of your home and your current loan-to-value aren’t figured into the above criteria.

You can also submit a written request asking your lender to cancel your PMI:

  • On the date your loan-to-value is scheduled to fall below 80% of the home’s original value.
  • If your current loan-to-value ratio is lower than 80%, perhaps due to rising home prices in your area or renovations you’ve done.
  • After refinancing your mortgage once you have at least 20% equity in the home.

Unlike PMI, if you have an FHA loan, your MIP may not ever be removed. The date your mortgage was finalized and the amount you put down determines your eligibility:

  • The MIP stays for the life of the loan for mortgages closed between July 1991 and December 2000.
  • The MIP will be canceled once your loan-to-value is 78%, if you applied for the mortgage between January 2001 and June 2013, and you’ve owned the home for five or more years.
  • If you applied after June 2013 and put at least 10% down, the MIP will be canceled after 11 years. If you put less than 10% down, the MIP stays for the life of the loan.

Refinancing an FHA loan to a conventional mortgage may provide you with additional options.

The pros and cons

There are a variety of pros and cons to consider when weighing the options of waiting to save a 20% down payment versus paying mortgage insurance.

Melanie Russell, a mortgage loan officer in Henderson, Nev., points out buying now can make sense if you expect home prices to increase or interest rates to climb.

What about waiting? In addition to avoiding mortgage insurance, putting more money down could lead to lower closing costs and a lower interest rate on your mortgage. Also, if you expect prices to drop, you’re saving on all the costs that could come with ownership, including taxes, mortgage, insurance, maintenance, and potential homeowners’ association fees.

In the end, it’s often a situational and personal choice. While Russell shared a few positives to buying early and paying for PMI, she also notes, “Only you can answer this question for yourself.”

When you don’t need mortgage insurance

There are also a few options that don’t require mortgage insurance, even if you can’t afford a 20% down payment.

For example, Veterans Affairs (VA) loans, offered to qualified veterans, don’t require mortgage insurance. You might not have to put any money down either, but these loans usually require an upfront payment at closing.

The Affordable Loan Solution program offered through a partnership between Bank of America, Freddie Mac, and the Self-Help Ventures Fund allows borrowers to put as little as 3% down without taking on PMI. Maximum income and loan amount limit requirements may apply.

You may also find some lenders willing to offer lender-paid mortgage insurance. You’ll pay a higher interest rate on the loan, but in exchange, the lender will make the insurance payments for you. “The math works differently every time,” says Fleming. “If a borrower thinks they won’t be in the property very long, [lender-paid mortgage insurance] might be a good choice, as sometimes the additional amount you pay is lower this way.”

However, if you’re in the home and paying off the mortgage for a long time, it could be more expensive than taking out a conventional loan with PMI. Because the premiums are built into your mortgage, you won’t be able to get rid of the extra payments after building equity in the home.

Another option could be to take out a second loan, called a piggyback mortgage. Although there are potential downsides to this route, you can use the money from the second loan to afford a 20% down payment and avoid PMI. Some people also borrow money from friends or family to afford a 20% down payment, but that could put your relationship in jeopardy if you run into financial trouble.

Finally, you might also discover lenders offering no-mortgage-insurance loans with a 10% to 15% down payment. As with the lender-paid mortgages, it’s important to review the fine print and the potential pros and cons of the arrangement.

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