What is FHA mortgage insurance & funding fee?

FHA logoUnlike other types of insurance, the FHA mortgage insurance does not protect the home buyer like homeowners insurance or life insurance, the FHA mortgage insurance protects the lender.

Every FHA mortgage includes an additional premium to protect the lender against bad loans. The accumulation of the FHA mortgage insurance premiums are used to payoff lenders who have foreclosed on delinquent borrowers. Because of the FHA default protection, lenders are more willing to offer loans to prospective home buyers who would not otherwise qualify for a mortgage. For example, the down payment is currently 3.5% with an FHA home loan and the approval rules are significantly less than commercially available home loans.

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Currently, the extra cost is 1.75% of the loan amount. Here is the FHA mortgage insurance premium calculation.

30 Year FHA upfront mortgage insurance example
1. Sales price $ 200,000
2. Less down payment (3.5%) $ 7,000
3. Base mortgage = $ 193,000
4. Funding fee percentage X 1.75%
5. Funding fee cost $3,377.50

The base mortgage (line 3) and the funding fee cost (line 5) are added together for a final loan amount of $196,377.50. The principal and interest payment is calculated on the "base" mortgage and upfront cost.

In addition to the upfront mortgage insurance, the borrower is required to pay a fee every month with their mortgage payment. The fee is called MIP, which is short for monthly mortgage insurance. Here's how the monthly MIP is calculated for a 30 year mortgage. The fee for a 15 year mortgage is less. The monthly mortgage insurance cost depends on the loan amount, down payment and term (length of the loan). For most borrowers, they will pay the premium on line 2.

30 Year Mortgage
Base Loan Amount Down Payment Percentage Effective Annual MIP
1. ≤ $625,500 5% to 9.99% down payment 1/26/2015 .80%
2. ≤ $625,500 4.99% or less (3.5%) down payment 1/26/2015 .85%
3. > $625,500 Less than, and equal to 5% down payment (≤ 95.00%) 1/26/2015 1.00%
4. > $625,500 Greater than 5% down payment (> 95.00%) 1/26/2015 1.05%

30 Year Fha monthly mortgage insurance example
Sales price $ 200,000
Less down payment $ 7,000
Base mortgage = $ 193,000
 
Base mortgage Monthly MIP Percentage   Annual MIP Cost Divided by 12 months Monthly Cost
$ 193,000 X .85% = $ 1,544.00 / = $ 136.71

The upfront and monthly FHA mortgage insurance is remitted to HUD/FHA which in turn goes to the US treasury who pay reimbursements to lenders who have foreclosed on delinquent borrowers on behalf of HUD/FHA.

There are loan limits with the FHA mortgages

Each year the Federal Housing Finance Agency establishes the maximum lending limit for FHA loans. For 2018, the maximum lending limits are as follows:

  • 1-unit home - $294,515
  • 2-units (duplex) - $377,075
  • 3-units - $455,800
  • 4-units - $566,425



2018 FHA high cost county limit exceptions

The high cost county list contains the US counties that are at or greater then $679,650 for 2018 (one family). 2018 FHA loan limits in high cost counties (pdf)

2018 FHA lower cost county limit exceptions

The lower cost county list contains the US counties that are greater than $294,515  (typical limit for a one unit or single family residence). 2018 FHA loan limits in lower cost counties (pdf)

FHA down payment calculation

The FHA down payment calculation is simple when the loan amount is at or less than the county lending limit. Simply subtract 3.5% from the sales price to arrive at the loan amount, however, the down payment calculation requires another step when the loan amount exceeds the FHA lending limit. Take a look at the "Over FHA limit" column. The lending limit is subtracted from the maximum loan limit to meet the lending limit. Another way to calculate the down payment is to subtract the maximum loan amount from the sales price (i.e. $400,000 - $289,500 = $105,485

30 Year FHA down payment example
 Under FHA limitOver FHA limit
Sales price$300,000 $400,000
Less down payment$10,500 $14,000
Base mortgage =$289,500 $386,000
FHA lending limit$294,515 (under limit)$294,515 (over limit)
Additional down payment $91,485

FHA mortgage insurance calculation for FHA jumbo loans

The upfront mortgage insurance is calculated in the "base" mortgage, in other words, the loan amount after subtracting out the down payment. When the base loan amount is "Over the FHA limit", the funding fee is multiplied against the maximum FHA limit.

30 Year Fha monthly mortgage insurance example
 Under FHA limitOver FHA limit
Sales price$300,000 $400,000
Less down payment$10,500 $14,000
Base mortgage =$289,500 $386,000
FHA lending limit$294,515 $294,515
Additional down payment $91,485
Funding Fee Calculation
Base mortgage =$289,500 $294,515 (maximum FHA limit)
X 1.75%$5,066.25 $5,154.01

Can I avoid the FHA mortgage insurance with a 20% down payment?

Unfortunately, no. The FHA mortgage insurance is applied to all FHA home loans regardless of the down payment. Even if you made a 50% down payment, you would be required to pay both the initial mortgage insurance premium ad the monthly premium.

FHA funding fee and monthly MIP over the years

UFMIP and MIP | after April 1, 2013 | June 11, 2012 | after 4-18-2011 | after 10-4-10 | after April 5, 2010 | after October 1, 2008 | after July 14, 2008 | Before 7-14-08 |

Effective for case numbers ordered on or after January 26, 2015
https://www.hud.gov/sites/documents/15-01ML.PDF  
   
Traditional Purchase and Refinance Products
   
Term > 15 Years
Base Loan Amount LTV Annual MIP UFMIP
<= $625,500 <= 95.00% .80 % 1.75%
<= $625,500 > 95.00% 85 % 1.75%
>$625,500 <= 95.00% 1.00% 1.75%
Amortization Term (Years) 1.75%
Term <= 15 Years
Base Loan Amount LTV Annual MIP UFMIP
<= $625,500 78.01% - 90.00% .45% 1.75%
<= $625,500 > 90.00% .70% 1.75%
>$625,500 78.01% - 90.00% .70% 1.75%
>$625,500 > 90.00% .95% 1.75%
Any Amount < 78% .45% 1.75%
Exception: New Streamline Refinances previously endorsed on or before May 31,2009
Base Loan Amount LTV Annual MIP UFMIP
Any Amount Any .55% .01%
MIP Rate (ie - .85)