When you put less than 20% down to purchase a home, there’s a higher risk that if the market declines, or if you can’t pay your mortgage and need to sell, you may not be able to cover the full loan balance and past due fees with the sale proceeds. That’s why lenders often require you to pay for mortgage insurance.
So, What is mortgage insurance for an FHA Lender?
According to the FHA single-family home loan handbook, “FHA offers various mortgage insurance programs which ensure approved Mortgagees against losses on Mortgages. FHA-insured Mortgages may be used to purchase housing, improve housing, or refinance existing Mortgages.”
The FHA insures a percentage of the loan amount so that in cases where a homeowner defaults on the FHA loan, the lender can open a claim for the balance of the defaulted amount and thus be made whole.
What is FHA Mortgage Insurance for a Home Owner?
When FHA mortgage insurance is required, the borrower can pay an upfront fee paid through closing costs. This amount is commonly known as the Up Front Mortgage Insurance Premium or UFMIP. According to HUD, “Most FHA mortgage insurance programs require the payment of UFMIP, which may be financed into the Mortgage. The UFMIP is not considered when calculating the area-based Nationwide Mortgage Limits and LTV limits. The UFMIP charged for all amortization terms is 175 Basis Points (bps), unless otherwise stated…” The UFMIP may either be financed entirely into the loan amount or paid as part of closing costs.
There is also an FHA mortgage Insurance Premium (MIP) which is included as part of your monthly mortgage payment. In most cases for new FHA loans, depending on the LTV ratio, Base Loan Amount and the term of the Mortgage, your MIP requirements will be for either 11 years or the entire duration of the home loan. The amount of MIP payments depends on the same factors that determine the duration of your MIP obligation; LTV ratio, Base Loan Amount and the term of the Mortgage.
MIP should not be confused with private mortgage insurance, which is required of many conventional mortgages. Private mortgage insurance (PMI for short) is not required by the FHA.