How to Calculate FHA Mortgage Insurance

Learn how the FHA premium is calculated

FHA mortgage insurance graphicThe FHA mortgage insurance is a type of insurance that's required by the federal government to protect your lender in the event that you default on your loan.

If you’re planning on buying a home, you’ll most likely be required to pay an additional fee called mortgage insurance.

This article will explain how to calculate the fee.

FHA Mortgage Insurance Premium

The popularity of the Federal Housing Administration (FHA) loan is due to its low down payment and strong credit scores. With an affordable down payment, home buyers with these credit scores can get into the market.

Unfortunately, with a low-down payment, you might end up with an additional expense when it comes to the closing costs of an FHA mortgage. Before you start looking into the details of an insurance policy, it's important to understand how it will affect your financial situation.

The monthly price for a Federal Housing Administration insurance policy is often comparable to that of a private mortgage insurance policy and other insurance plans. This insurance is meant to safeguard the lender in the event of a foreclosure.

The upfront fee of 1.75% of the loan amount is rolled into your monthly payment, while the annual MIP is usually around 0.85%.

How to Calculate FHA Mortgage Insurance (upfront premium)

FHA mortgage insurance consists of two parts, the initial upfront mortgage insurance and the monthly insurance premium (MIP).

The upfront mortgage insurance is a 1.75 percent of the the loan amount.

This must be paid at the time of closing. For example, if the price you paid for the house is $200,000 and your loan amount is $193,000, then your upfront the cost of mortgage insurance at closing will be $3,377.50 ($193,000 X 1.75%)

Sales Price = $200,000
Less down payment = $7,000 (3.5%)
Base loan amount = $193,000 ($200,000 - $7,000)
Funding fee = $3,375 ($193,000 X 1.75%)
Final Loan Amount = $196,378 ($193,000 + $3,375)

How to Calculate MIP on a FHA Loan (monthly premium)

This mortgage insurance payment will be calculated differently depending on the size of your down payment and the loan-to-value ratio (LTV).

Sales Price = $200,000
Less down payment = $7,000 (3.5%)
Base loan amount = $193,000 ($200,000 - $7,000)
Mortgage insurance premium = $1,640.50 ($193,000 X .85%)
Divide the annual premium by 12 months = $1,640,50/12 =  $136.71

The $136.71 is added to your monthly mortgage payment.

The previous examples assume a loan amount less than $625,000 with the minimum down payment of 3.5%.

Down Payment MIP Duration
10% or greater 0.80% for 11 years
5% to 9.99% 0.80% for 30 years
0 to 4.99% 0.85% for 30 years

Using the FHA MIP table above, the FHA MIP rate is 0.85 percent for the minimum down payment requirement.

Tip: One of the most important factors that you can consider when it comes to choosing a mortgage insurance policy is the amount of money that you'll put down on the home. This will help lower the MIP rate and keep you on track with your monthly payment.

How long do you have FHA mortgageAnimated calendar insurance?

From the chart above, you can see that the monthly mortgage insurance can only be removed with a 10% down payment.

Is it possible to finance the FHA's upfront mortgage insurance fee?

The upfront fee for mortgage insurance can be rolled into the loan or financed. This is a huge benefit to low-income individuals who don't have a lot of money saved for the closing costs. The fee must be paid in cash or financed

  • Paid in cash at settlement
  • Paid by the lender (with a higher interest rate)
  • Paid by the seller (as a sales concession)
  • Paid with gift funds

The charge cannot be divided by financing part of it and paying the remainder in cash.

- Financing the charge has no effect on your DTI or the amount of loan you qualify for.
- The upfront charge is not included in the minimum down payment requirement.

If you finance the FHA up front mortgage insurance charge, you'll have to pay interest on it for the duration of the loan's term.

Can Gift Funds Pay the Upfront FHA Mortgage Insurance?

The Federal Housing Administration has rules about who can give you an upfront mortgage insurance policy as a gift. A close friend or relative can do this. This kind of insurance can help pay for a home loan's down payment and closing costs.

How to Get Rid of FHA Mortgage Insurance

Woman tearing the PMI paper in halfIf you were assigned an FHA case number before to June 3, 2013 and your loan balance has fallen below 78%, you may request a reduction in your yearly mortgage insurance cost.

If your FHA loan was issued after June 3, 2013 and you made a down payment of more than 10 percent, you can request that the FHA mortgage insurance premium (MIP) be withdrawn after 11 years.

Even if you pay off your loan sooner and reach a 78 percent LTV, you'll still have to wait 11 years.

There is no way to get rid of the FHA mortgage insurance premium (MIP) after June 3, 2013, even if your loan was approved before then and you put down less than 10%.

Switching to a loan program that isn't insured by the FHA is the only method to avoid paying the FHA mortgage insurance payment in this circumstance.

PMI on conventional loans vs. FHA mortgage insurance

There are a few differences between the mortgage insurance premiums that are charged by the Federal Housing Administration and the private mortgage insurance that's typically used for conventional loans.

For instance, the monthly payment that you'll receive from the private mortgage insurance is based on the loan amount and credit score.

If the loan balance has dropped below 80% of the original value, you can request to have the annual mortgage insurance premium lowered. If it reaches 78%, the lender will automatically cancel or remove the insurance policy.

The monthly payment that you'll receive from the private mortgage insurance will be higher than the Federal Housing Administration's mortgage insurance premium.

For instance, if you're planning on purchasing a home with a total loan amount of $235,000, the monthly payment from the private mortgage insurance would be $236.96 instead of $166.46 for the Federal Housing Administration mortgage insurance.

Rotating question markFAQs About How to Calculate FHA Mortgage Insurance

The maximum loan amount that can be approved for a mortgage with the Federal Housing Administration (FHA) varies depending on the county and the type of home that you're looking to purchase. In high-cost areas, for instance, the maximum loan amount that can be approved for a home purchase is typically higher.

Home buyers must put at least 3.5 percent down on an FHA loan.

The highest loan-to-value ratio allowed by the FHA is 96.5 percent, indicating that the loan amount cannot exceed 96.5 percent of the home's worth. With a 3.5% down payment, your loan amount falls below the FHA's LTV requirement.

Unlike with conventional mortgages, an FHA loan does not require mortgage insurance when a person puts 20 percent down. However, if a person puts at least 10 percent down, they would only have to pay for the insurance for 11 years instead of the entire life of the loan.

A conventional loan is normally preferable if a person has a credit score of at least 620 and a 20% down payment.

Like other loans, the closing costs for an FHA mortgage are typically around 2 to 3 percent of the loan amount. However, most borrowers choose to pay the insurance fee upfront, which means that it will increase their costs significantly. Also, unlike with conventional mortgages, an FHA insurance fee is only charged if the borrower rolls it into the loan.

The principle and interest on the loan amount, mortgage insurance premiums, monthly homeowners insurance payments, and monthly property taxes are all included in a typical FHA loan payment.

Every month, FHA homeowners in a condo or PUD must pay homeowners association (HOA) dues.

Although an FHA loan doesn't require mortgage insurance, it will still increase your monthly payments. On the other hand, if you have a good credit score and a down payment of less than 20 percent, a conventional loan might be more affordable.

If you have a low credit score and a down payment of less than 3.5 percent, the private mortgage insurance (PMI) on a conventional loan might be more expensive than an FHA MIP.

An upfront mortgage insurance premium is typically the only component of a loan that can be included in an agreement with the Federal Housing Administration (FHA). Other closing costs, such as the underwriting fees and the origination fee, are typically paid out of pocket.
 
Although the interest rate on an FHA mortgage is typically lower than that of a conventional loan, it does not mean that a lower monthly payment is necessarily a better deal. An increase in the mortgage insurance premium can also add to the cost of the loan. A good way to determine the true cost of a loan is by looking at the annual percentage rate (APR).

Unlike other types of loans, the interest rates on an FHA mortgage are not set by the government. Instead, they are set by the lenders, and they can vary depending on the type of loan and the borrower's credit profile. For instance, the lowest interest rate can be offered to the most risk-averse borrowers, while the highest rate goes to those with a poor credit history.
 
Most lenders who are approved for an FHA mortgage can prequalify you for a loan. Doing so allows them to evaluate your financial situation and provide a more accurate assessment of your credit. Having a preapproval letter from a loan officer can be very valuable when you're trying to find a home.
 
Refinancing with an FHA loan usually requires a waiting period of about 210 days. For other types of loans, such as USDA loans, the waiting period is usually around six months. Unlike conventional loans, there is no waiting period for cash-out refinances.

Read more questions and answers about FHA loans

Conclusion

In conclusion, the FHA mortgage insurance premium is a necessary cost for those looking to purchase a home with an FHA loan. However, it is important to understand how the premium is calculated and what factors can affect the overall cost. By following these simple steps, borrowers can confidently navigate the mortgage insurance process and make an informed decision about their home purchase.

SOURCE:
Monthly (Periodic) Mortgage Insurance Premium Calculation
Appendix 1.0 – Mortgage Insurance Premiums

Recommended Reading

  1. FHA Loan Credit Requirements: Everything You Need to Know
  2. FHA Debt-to-Income Ratio: Everything You Need to Know
  3. FHA Loans and the Minimum Down Payment Requirement