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FHA Funding Fee and MIP Explanation

FHA logoUnder the FHA program, the federal government "backs" the mortgage. In other words, if the borrower fails to pay the mortgage, and the house goes into foreclosure, the federal government will reimburse the bank for the loss and take possession of the house. Foreclosed homes that pass to the FHA are commonly called HUD homes.

Because of the federal "insurance", banks are more willing to offer financing to prospective home buyers who cannot obtain a loan with any other home mortgage.

The FHA mortgage insurance is not life insurance or a home protection plan; it's the extra cost applied to the loan to provide a funding program for banks with defaulted FHA home loans.

Every home buyer pays a little extra when they take out an FHA mortgage. The extra cost is added to the loan amount or the additional cost can be paid in cash at closing. This extra cost is the mortgage insurance premium, also called upfront mortgage insurance (UFMIP). The mortgage insurance funding fee is sent to the FHA/HUD after closing/settlement by the lender. Lenders must submit the upfront MIP within 10 calendar days of the mortgage closing or disbursement date, whichever is later. Penalties are assessed on a late upfront MIP payments.  The accumulation of funding fees from each loan is where the FHA obtains the money to buy back the bad loans from the lenders.

In addition to the upfront mortgage insurance, borrowers are required to pay an add on premium with their mortgage payment. The cost is called monthly mortgage insurance, MIP for short.

How is FHA mortgage insurance calculated?

The FHA funding fee and monthly mortgage insurance has changed numerous times over the years. Currently, the upfront mortgage insurance is 1.75% of the loan amount. Here's the math:

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.

FHA mip calculation

The monthly mortgage insurance premium(mip) has become more difficult with the April, 1, 2015 change. The insurance percentage is determined by the "base" loan amount, down payment percentage and loan term (i.e. 30 or 15 years)

The first step in calculating the monthly MIP is to determine the loan amount and down payment percentage. If the loan amount is less than or equal to $625,000 (and a term of 30 Years), and the down payment is equal to or less than 5%, use the cost factor on line 1.

Down payments greater than 5% and loan amounts less than $625,000 are based on a cost on line 2. Lines 3 and 4 should be self explanatory.

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%

Using the example above,

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

Fifteen year loans are calculated in the same way, although the cost factor is lower

Rotating question markFrequently Asked Questions About FHA mortgage Insurance

Q. Do all FHA loans have mortgage insurance?
Emoticon with thumbs down to FHA cancellation of the monthly mortgage insurance premiumA. Yes. It's the mortgage insurance premium that makes the program work. The mortgage insurance is required on all FHA loans.

You can use the FHA loan calculator to estimate the upfront funding fee and monthly MIP.

Q. Do I need FHA mortgage insurance?
A. You don't have a choice. It is required for the loan.

Q. How to get rid of mortgage insurance on a FHA loan?
A. On January 31, 2013 the Department of Housing and Urban Development announced a change to the cancellation of the monthly mortgage insurance premium.

Whether you can eliminate the MIP depends on when your loan application was entered into the FHA computer.

Prior to June 3, 2013, your monthly MIP will automatically cancel when you have 22% equity. For example, if the value of your home is $100,000 and the loan balance is $78,000 or less, you meet one of the conditions. Condition number two, the mortgage insurance has been paid for at least 5 years. For a 15-year loan originated earlier than June 3, 2013, the 78% loan balance must be met, however there is no 5-year requirement for payment.

After June 3, 2013, you are not able to remove the MIP if your mortgage had a term greater than 15 years (i.e. 30 years) and the down payment was less than 10%. For FHA loans with a down payment of 10% to 22%, the MIP can be cancelled after 11 years.

If you do not meet one of the conditions above, the only way you can eliminate the MIP is through a mortgage refinance.