FHA Mortgage Insurance
FHA loans are extremely popular with more than 25% of all mortgages being FHA insured. Home buyers with a very small down payment or lower credit scores are able to finance their dream homes using an FHA home loan.
With the benefits of qualifying with a low-down payment comes the added expense of the FHA mortgage insurance as part of your FHA closing costs. Learn about FHA mortgage insurance and how much it will cost before you move forward with your mortgage.
What is FHA Mortgage Insurance?
The FHA Mortgage Insurance Premium or “MIP”, is an insurance policy paid by the borrower to protect the lender from losses in the event the loan defaults. There is an upfront insurance premium of 1.75% of the loan amount, and then a monthly premium for the life of the loan.
How is FHA Mortgage Insurance Calculated?
There are two components to FHA mortgage insurance or MIP. The first is the upfront mortgage insurance premium of 1.75% of the loan amount. That needs to be paid at closing.
As an example, if your purchase price is $243,500 and your loan amount is $235,000, then your upfront mortgage insurance premium at closing will be $4,112.50 ($235,000 X 1.75%)
The upfront mortgage insurance premium needs to be paid on all FHA loans except the following:
- FHA Streamline Refinances
- Loans on Indian lands
- Loans on Hawaii Home Lands
The second portion is the annual FHA mortgage insurance premium which is divided by 12 and added to your monthly mortgage payment. The calculation of this payment will vary based upon the loan amount and your down payment amount or loan to value ratio (LTV).
Example: Loan amount of $235,000 + 96.5% LTV + 30 yr fixed loan
- $235,000 X .85% = $1,997.50
- $1,997.50 Divided by 12 = $166.46
- $166.46 is added to your monthly mortgage payment
You can see from the chart below, the loan amount is less than $625,000, the LTV is greater than 95% and the mortgage term is greater than 15 yrs. So, the rate used for the MIP calculation is .85%
Total FHA Mortgage Insurance Premium in the example above = $4,112.50 plus $166.46 per month
Tip – the more money you put down on the home, the lower your MIP rate will be that is used to calculate your monthly insurance premium. This could save you a lot of money over the life of your loan
FHA Mortgage Insurance Calculation Chart
This chart is the guide you should use when determining the annual mortgage insurance premium (MIP) for your persona loan scenario. Most individuals who are considering an FHA loan will likely fall into the less than $625,500 loan amount category and with a term greater than 15 years.
Can the FHA Up Front Mortgage Insurance Fee Be Financed?
The upfront FHA mortgage insurance fee can be financed or rolled into the loan. This a huge benefit for those who don’t have very much saved for closing costs. Here are some of the features or rules around financing the FHA up front mortgage insurance fee:
- The fee must be paid in cash or financed
- The fee cannot be split by financing some of it and paying cash for the rest. It is one or the other
- Financing the fee does not impact your DTI or reduce the loan amount that you qualify for.
- The upfront fee is not considered to be part of the minimum down payment amount
Financing the FHA up front mortgage insurance fee means you will be paying interest on it for the life of the loan.
Tip – negotiate with the sellers of the home to have them cover this cost at closing.
Can the Upfront FHA Mortgage Insurance be Gifted?
The upfront FHA mortgage insurance (MIP) can be gifted by a relative or close friend per the FHA Guidelines. The FHA gift funds could cover the down payment plus some or all of the FHA closing costs. When you find yourself short on cash to purchase the home, then a gift may be what you need.
How to Remove Mortgage Insurance (MIP) from an FHA Loan
If you got your FHA loan on or before July 3rd, 2013 AND your loan balance is now at or below a 78% loan to value, you can request to have the annual/monthly mortgage insurance premium dropped.
If your FHA loan is dated after July 3rd 2013 and you put more than 10% down, you can request to have the FHA mortgage insurance (MIP) removed after 11 years. Important to note is the waiting period is a minimum of 11 years so even if you pay down your loan faster and reach 78% LTV, you still need to wait 11 years.
If your FHA loan is dated after July 3rd 2013 and you put 10% or less down, then the FHA mortgage insurance premium (MIP) is in effect for the life of the loan and cannot be cancelled. In this scenario, the only possible way to free yourself from the FHA mortgage insurance premium is to refinance to a loan program that is not FHA insured.
FHA Mortgage insurance vs PMI for Conventional Loans
There are a few significant differences between FHA mortgage insurance premiums (MIP) and PMI for conventional loans. Conventional PMI is calculated using the loan amount, credit score and LTV as the main factors in determining your monthly PMI payment. Here are some other things to know:
PMI can be cancelled or removed if you pay the balance down below 80% of the original appraised value. If you forget, the lender is required to do it automatically once it reaches 78%.
The PMI monthly insurance payment will likely be more than FHA mortgage insurance (MIP), but it is not enforced for the life of the loan.
In our example above with the $243,500 purchase and $235,000 loan amount, the monthly PMI payment would be $236.96 versus $166.46 for the FHA mortgage insurance. We used the MGIC calculator to determine the PMI payment.
Most home buyers save for a down payment, but FHA mortgage insurance is something that is often overlooked when determining the costs to purchase a home. By now you should be fully educated on the FHA mortgage insurance component of your real estate transaction. Plan ahead and determine how you will cover these costs.
Is FHA Mortgage Insurance Tax Deductible?
The FHA mortgage insurance premium may be tax deductible if your adjusted gross income does not exceed $109,000 per year. It is important to note we are not monitoring the changes in the tax laws closely and this figure may not be up to date. You should consult an accountant for tax planning purposes.
How to cancel FHA Mortgage Insurance
If your FHA loan is dated after July 3rd, 2013 you cannot cancel it unless your original down payment was greater than 10%. If your down payment was greater than 10%, you can cancel the FHA mortgage insurance once the loan balance drops to a 78% LTV.
Is FHA Mortgage Insurance Considered to Be Part of Closing Costs?
One of the most common home buyer mistakes is not setting enough money aside for all of the costs related to the purchase of the home. The FHA upfront mortgage insurance premium is possibly the single largest closing cost item that you may have outside of your tax escrows.