FHA Mortgage Insurance | Help For First-Time Home Buyers

The FHA Mortgage Insurance Premium Program at a Glance

Looking to buy a home? The FHA purchase mortgage is a popular alternative, combining low down payment and easier credit score requirements.

One crucial aspect of FHA purchase mortgages is that mortgage insurance is a standard requirement. FHA loans require home buyers to take out mortgage insurance, even if the down payment is over 20%.  However, in practical terms, almost all FHA loans have close to the maximum LTV, with a down payment as low as 3.5%.

When shopping for a mortgage, look at all of your costs, including mortgage rates, lender fees, and third-party fees. When comparing an FHA loan to other mortgages, mortgage insurance is a significant cost. 

Learn more about the FHA mortgage insurance, how much it costs and when you can cancel it. 

Why is There FHA Mortgage Insurance?

Mortgage Insurance helps you purchase a home even if you don't have a large down payment or a weak credit score. For example, if you do not have much equity, then based on past loan performance, your loan is a higher level of default risk.

The US government guarantees FHA Mortgage loans. To maintain the FHA mortgage program, the government charges both an Upfront Mortgage Insurance Premium (UFMIP) and a Monthly Mortgage Insurance Premium (MIP).

Depending on the status of the fund, mortgage insurance premiums change from time to time. For example, in 2013, facing a potential bailout, the FHA increased mortgage insurance premiums. In 2015, the FHA dropped the premiums. In 2017, the Obama administration planned an additional drop in the premiums. However, the Trump administration canceled this.

FHA Mortgage Insurance Costs

FHA has both an upfront fee and Monthly Insurance premium, based on an annual mortgage premium, rate. The most popular FHA purchase mortgage is a 30-year fixed rate mortgage, under $625,000, and a loan-to-value (LTV) over 95%, The current FHA mortgage rates for that loan are 1.75% upfront fee and 0.85% annual mortgage premium.

Up-Front Fees

Unlike the traditional PMI, the FHA Mortage Insurance includes a 1.75% up-front fee (UFMIP) at the time of closing. The most common way to pay the UFMIP is to add it to the amount of your loan and make monthly payments for the life of the loan.

FHA Monthly Insurance Premium

The FHA Annual Mortgage Insurance Premium (MIP) is calculated using three factors:

• Term (Length of the Loan): Less than/equal to 15 years or more than 15 years
• Loan Amount: Less than or equal to $625,000 or Greater than $625,000
• LTV: Has different ranges depending on the length of the loan.

The following chart shows the FHA MIP rates that are current in 2019:

For historical perspective check out changes in 2013 and 2015.

The FHA mortgage insurance premium is an annual premium. The payments are made monthly and adjusted each year based on a formula which takes into consideration the adjusted average balance for the following year.

FHA Mortgage Insurance Cancellation

In 2013, the FHA made the removal of mortgage insurance more difficult. Instead of allowing an automatic cancellation policy, most purchase mortgage loans (30-years) are payable for the entire length of the loan. Loan-to-Value ratios determine when the FHA mortgage insurance is canceled.  Here are the cancellation rules for loans that are $625,000 or less:

• • LTV less than or equal to 90%: 11 years
  • LTV greater than 90%: full term of the loan.

In general, conventional loan private mortgage insurance (PMI), can be removed if the loan balance is below 80% of the current market value. In general,  lenders are required to automatically remove PMI when the loan balance falls to 78% of the original loan amount.

FHA Mortgage Insurance For Buying a Home - An Example

Here is an example of FHA mortgage insurance costs for a high LTV loan. If you purchase a home for $268,000 and put down 3.5% ($9,380) and take out a $258,620, 30-year Fixed Rate Mortgage (FRM), then your fees would be:

• Upfront MIP: 1.75% * $258,620 = $4525.85 . The UFMIP can be added to the loan and paid off each month. Your monthly payment for this fee would be about $23 (depending on your interest rate).

• Monthly MIP: The FHA annual premium is 0.85% multiplied by the loan amount. Your first-year payments would be approximately $183.19.

• Your monthly payment would vary depending on your initial interest rate. See the chart below for different monthly payment scenarios, depending on mortgage rates. 

FHA Mortgage Insurance - Is it Worthwhile?

Shopping for a mortgage is not simple. While FHA loans have advantages due to looser credit requirements, they are not always the cheapest loan or the best choice. There are other low down payment mortgage alternatives. 

Mortgage rates constantly change. In general, FHA loans have lower rates. However, when shopping take into account all of the costs, including the upfront costs, monthly mortgage premiums and all other lender and third-party fees.

Here is an example of today's mortgage rates:

Lower FHA MIP rates make for more attractive FHA loans, especially for those who are at the bottom tier of the credit score for a conventional loan (620-680). However, both Fannie Mae and Freddie Mac offer high LTV, low down payment purchase mortgages for lower to middle-income households with discounted Mortgage Insurance rates.