FHA Funding Fee ExplanationFor the lack of a better term, think of the funding fee as a slush fund. In the State of Pennsylvania, we pay an uninsured/under insured fee on our auto policy. The reason is because there are drivers who do not have auto insurance or are under insured. So we all chip in a little extra on our insurance premium to cover the unfortunate person who has an accident with one of these drivers. HUD/FHA and the VA have a similar concept. Each FHA mortgage applicant pays in cash at closing, or finances a "little extra" called the FHA funding fee. Now when a lender forecloses on an FHA or VA mortgage, the lender seeks repayment of loss from this Funding Fee "slush fund", again for lack of a better term, but you get the point. The lender is not totally indemnified, the lender is paid a percentage of the loss. Once the lender is paid off, HUD/FHA takes ownership of the house and resells the house (i.e. HUD house). In addition to the FHA funding fee, the home buyer also pays a small premium each month as part of their mortgage payment. This known as MIP, mortgage insurance premium. The FHA funding fee calculation is as follows: FHA Funding Fee Cost Example: |
| Sales price | $ 100,000 | | Less Down Payment | $ 3,500 | $100,000 X 3 1/2% minimum down payment | | Mortgage Amount | $ 96,500 |
You have the choice of paying the FHA funding fee in cash at closing or financing it in the mortgage. If you finance the FHA funding fee, here's the calculation.
| Mortgage Amount (Base) | $ 96,500 | | Funding Fee Percentage | X 2.25% | | Funding Fee | $2,171.25 |
| Mortgage Amount | $ 96,500 | | | Funding Fee | + $2,171.25 | | | Total Mortgage Paid to Bank | $98,671.25 | New mortgage includes the FHA Funding Fee |
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For information on FHA underwriting guidelines and requirements, mortgage loans, FHA mortgage limits, and FHA mortgage insurance, click here: 
$ 98,189 >
$ 2,171.25 >