For the lack of a better term, think of the FHA funding fee as a slush fund. Yes, I know it sounds crass, but as you read on, you will easily understand the FHA funding fee. In the State of Pennsylvania, we pay an uninsured/under insured fee on our aυto policy. The reason is because there are drivers who do not have autо 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.
The Federal Housing Administration (FHA) employs a similar concept with the FHA home loan. Each FHA loan applicant pays in cash at closing, or finances a "little extra" called the FHA funding fee. Now when a mortgage lender forecloses on an FHA loan, the mortgage company seeks repayment of the loss from this Funding Fee "slush fund", again for lack of a better term, but you get the point. The mortgage company is not totally indemnified, the lender is paid a percentage of the loss. After the mortgage company is paid off, the department of Housing and Development (HUD) takes ownership of the house and resells the house. These homes are commonly called HUD homes, or FHA foreclosures.
In addition to the FHA funding fee, the home buyer also pays a small premium each month as part of their mortgage payment. This fee is known as MIP - "mortgage insurance premium". (PMI stands for "private mortgage insurance" and is the monthly premium paid under a "conventional loan").
Even if your FHA down payment is 20%, you will still incur the upfront funding fee and monthly insurance premium (MIP).
The Federal Housing Administration (FHA) loan program does not have a sales price limit, however, the Federal Housing Administration does set maximum loan amounts for each US county. The typical loan limit for a single family residence or condominium is $271,050, for two residential units (duplex), the loan limit is $347,000, three units, the limit is $419,425 and a four unit dwelling is $521,250. There are county exceptions.
Calculating the correct FHA loan amount can be a bit tricky, so I'll walk you through the calculations step by step. As stated in the previous paragraph, the typical county limit for a single family home (and "approved FHA condominium) is $271,050. Working backwards, the maximum sales price would be approximately $280,880.
The minimum down payment percentage for an FHA loan is 3.50% (currently)
Looks pretty simple right? Simply multiply the sales price by the down payment percentage to arrive at the "base mortgage. Multiply the base mortgage by the funding fee percentage and add that cost to the base mortgage and you have the Fha mortgage that includes the funding fee. By the way, the principal and interest payment is based on the "full" mortgage (base loan and funding fee together). But if you recall, there are "maximum FHA loans amounts. So what if the sales price is $500,000 and the maximum loan amount is $271,050? Here's the calculation.
So where does the funding fee go?
What is the monthly mortgage insurance on an FHA loan?
The monthly mortgage insurance premium has become a little more difficult with the April, 1, 2013 change. The insurance percentage will be 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. If the loan amount is less than or equal to $625,000 (and a term of 30 Years), focus on numbers 1. and 2. If the down payment is the minimum FHA percentage of 3.5% or up to 5% down, use row "1.". If the down payment is greater than 5% and less than $615,000, use the annual mip premium listed on line 2.
Up until June 3, 2013, the following chart lists the FHA monthly mortgage insurance percentage for FHA loans with loan terms of 15 years or less. On June 3, 2013, HUD/FHA will utilize a revised 15 year (and less) monthly fee calculation. ML 2012-4.pdf)
Let's calculate the monthly mortgage insurance premium
for a 30 year FHA loan. Using the example above. The sales price is
$100,000 and the minimum down payment is 3.5%, that means FHA requires
a 1.35% annual premium - number 2.
If the loan amount is greater than $625,000, use either number 3. or 4. based on the down payment percentage.
What's a FHA loan?
These pages contains a variety of information on FHA home loans.
Home Buying Videos
Here are three great videos produced by the Department of Housing and Urban Development (HUD).Shopping for Your Home