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FHA Funding Fee & Monthly Mortgage Insurance Premium (MIP)

US flag waivingFor information on FHA underwriting guidelines and requirements, mortgage loans, FHA mortgage limits, and FHA mortgage insurance, click here:  FHA Home Page. You can calculate the FHA funding fee and monthly mortgage insurance premium (MIP) with this link: FHA Mortgage Insurance | MIP | FHA Funding Fee & MIP Calculator 

FHA Funding Fee Explanation

For 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 PercentageX 2.25%
Funding Fee$2,171.25

 
Mortgage Amount$ 96,500 
Funding Fee+ $2,171.25 
Total Mortgage Paid to Bank$98,671.25New mortgage includes the FHA Funding Fee

You pay the lender $ 98,671.25 and the lender forwards the FHA funding Fee to HUD/FHA
Picture of a house $ 98,189 >Picture of a bank building  $ 2,171.25 >Picture of government building
 

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The calculators are made available to you as a self-help tool for illustrative use only. Examples are hypothetical. We can not and do not guarantee the applicability or accuracy in regards to your individual circumstances. I encourage you to seek personalized advice from qualified professionals.

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Last updated 08/30/2010
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