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FHA loan questions 1-17

FHA loan questions 18-31

What Is Mortgage Insurance for FHA Loan?

FHA logoUnlike other forms of insurance, such as homeowners or life insurance, FHA mortgage insurance protects the lender. Each FHA mortgage contains a premium to safeguard the lender against poor loans.

The FHA mortgage insurance premiums are accumulated and used to compensate lenders who have foreclosed on delinquent borrowers. Due to the FHA's default insurance, lenders are more likely to lend to prospective house purchasers who might not qualify for a mortgage otherwise.

For example, the down payment on an FHA house loan is now 3.5 percent, and the approval requirements are much less stringent than those on conventional home loans.

Currently, the 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 combined cost of the basic mortgage (line 3) and the financing charge (line 5) results in a total loan amount of $196,377.50.
The principle and interest payment is determined by the "base" mortgage amount and the upfront fee.

Along with the upfront mortgage insurance premium, the borrower must pay a monthly charge with their mortgage payment. MIP is an acronym for monthly mortgage insurance. The monthly MIP for a 30-year mortgage is computed as follows. A 15-year mortgage has a lower charge.
The monthly mortgage insurance premium is determined by the loan amount, the down payment, and the term of the loan (length of the loan). For the majority of debtors, the premium on line 2 will be paid.

30-year mortgage insurance calculation
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 are 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 2021, the maximum lending limits (for most US counties) are as follows:

  • 1-unit home - $356,362
  • 2-units (duplex) - $456,275
  • 3-units - $551,500
  • 4-units - $685,400

2021 FHA lower cost county limit exceptions

There are many US counties that exceed the 'standard' loan limits. These counties are greater than $356,362 (typical limit for a one unit or single-family residence). 2021 FHA Areas Between Floor and Ceiling

2021 FHA high cost county limit exceptions

The high cost county list contains the US counties that are at or greater than $822,375 for 2021 (one family). 2021 FHA loan limits in high-cost counties (PDF)

FHA loan down payment and 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 limit Take a look at the Over 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 jumbo loan calculation

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 limit Over 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 mortgage insurance historical chart

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)