What does FHA mortgage insurance cover?

FHA mortgage insurance graphicWhen you obtain an FHA-insured mortgage loan, you must pay an upfront insurance premium, which may be included in the loan you get from a FHA-approved lender. You will also be required to pay a monthly insurance premium, which will be added to your normal mortgage payment. The premiums are used by the FHA to reimburse the lender if you fail on your mortgage. The FHA mortgage insurance does not cover death.

Regardless of down payment, every applicant who obtains an FHA loan must pay a funding fee. The financing charge is now 1.75 percent of the 'base' mortgage amount. The base mortgage is the loan amount after deducting the down payment. The upfront mortgage insurance cost may be paid in cash at settlement, or it can be rolled into the loan. The majority of borrowers finance the upfront mortgage insurance.

The borrower must also pay an annual charge to the FHA in addition to the upfront mortgage insurance payment. The yearly premium is calculated and paid monthly based on the base mortgage (MIP). FHA mortgage insurance is used to safeguard lenders from losses caused by mortgage defaults.

The FHA mandates upfront and yearly mortgage insurance for all borrowers, regardless of down payment size.

Upfront mortgage insurance premium calculation

Sales price $100,000
Less minimum down payment $3,500 ($100,000 X 3.5%)
Base mortgage $96,500

Multiply $96,500 X 1.75% = $1,688.75 (upfront mortgage insurance cost)

Total mortgage equals $96,500 + $1,688.75 = $98,189

FHA mortgage insurance monthly

The initial, upfront mortgage insurance cost is very simple. Just deduct the down payment from the sales price and multiply by 1.75 percent.

The yearly renewal cost is a little trickier. The FHA mortgage insurance premium (MIP) is calculated on an annual basis, although it is paid monthly as part of your FHA mortgage payment. The FHA MIP rate is determined by the length of your loan and the amount of your down payment.

Take a look at the following from our UFMIP example:

For loan amounts up to and including $625,500 and a 30 year term

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.

Sales price $100,000  
Minimum down payment $3,500  
Base mortgage $96,500  
X .85% $820.25 annual cost
divided by 12 months $68.36 monthly

The FHA provides a chart that lists the monthly insurance percentages for loan amounts greater than $625,000 and terms less than 30 years.