Explanation of the FHA Funding Fee & Monthly Mortgage Insurance Premium (MIP)

FHA Funding Fee Explanation

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 аccident with one of these drivers.

The Federal Housing Administration (FHA) employs a similar concept to keep the FHA loan program solvent. Each FHA loan applicant pays in cash at closing, or finances a "little extra" called the FHA funding fee. Now when a lender forecloses on an FHA mortgage, the lender seeks repayment of the 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).

Monthly Mortgage Insurance Premium (MIP)

In addition to the FHA funding fee, the home buyer also pays a small premium each month as part of their mortgage payment. This 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).

See below for a further explanation on the cancellation of the FHA monthly mortgage insurance premium.

Here's the monthly mortgage insurance premium calculation

So here's what happens. You finance the FHA Funding Fee and the lender forwards the FHA funding fee to HUD (FHA).

You're mortgage is $ 97,465.00	The bank sends $ 965.00	to HUD - FHA

Canceling FHA's Annual Mortgage Insurance Premiums. (also known as pmi)

Here's the answer: FHA requires that you pay the mortgage for a minimum 5 years and have at least 22% equity. If you want to eliminate the monthly mortgage insurance, you will have to make an over payment every month. Here's why, using the same example above (Using the BASE MORTGAGE - $96,500 (without the funding fee) and using a simple amortization schedule at 6% for 30 years, it will take 11 years to achieve 22% equity.

But don't take my word, here are the mortgagee letters from HUD/FHA:
00-38ml - Canceling MIP.doc
00-46ml - Canceling MIP.doc. . .

HUD Web Site - Discontinuing Monthly Mortgage Insurance Premium Payments.