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FHA mortgage insurance

FHA Mortgage Insurance Explainer

April 19, 2013 / in Featured, FHA Streamline, Mortgages Explained / by tim

FHA mortgage insurance premiums have recently undergone changes and become more expensive.

As of June 3, 2013, FHA mortgage insurance on most new FHA loans is payable for the life of the loan. It’s important to know how FHA mortgage insurance works so you can make an educated decision on whether an FHA loan is right for you.

Why is there FHA mortgage insurance?

The FHA does not issue mortgage loans but instead issues mortgage lending guidelines and mortgage insurance. It will pay back lenders when a borrower goes into default, as long as the lender qualified the mortgage with FHA-imposed guidelines.

The FHA mortgage insurance premium (MIP) is based upon a percentage of the loan amount and comes in two types, a premium paid at the loan closing, called the upfront mortgage insurance premium, or UFMIP. In addition, there is a premium paid monthly.

FHA UFMIP

The UFMIP is 1.75 percent of the loan amount for a purchase and standard FHA mortgage. If the loan amount is $200,000, the FHA mortgage insurance premium is 1.75 percent of $200,000, or $3,500. The premium goes to FHA and can be rolled into the loan amount instead of being paid out of pocket.

For qualifying FHA streamline refinance loans, the UFMIP is only 0.01 percent as long as the FHA loan was endorsed by FHA on or before May 31, 2009.

Monthly Mortgage Insurance Premiums

In addition to the UFMIP required, FHA loans also have an annual mortgage insurance premium that is paid monthly and can vary based upon the loan to value, loan term, and loan amount. Here are the new premiums effective as of April 1, 2013:

30 year Loans Less than $625,500

  • Loan to value less than 95 percent, the premium is 1.30 percent of the loan amount
  • Loan to value greater than 95 percent, the premium is 1.35 percent of the loan amount

30 year Loans Greater than $625,500

  • Loan to value less than 90 percent, the premium is 1.50 percent of the loan amount
  • Loan to value greater than 90 percent, the premium is 1.55 percent of the loan amount

15 year Loans Less than $625,500

  • Loan to value less than 90 percent, the premium is 0.45 percent of the loan amount
  • Loan to value greater than 90 percent, the premium is 0.70 percent of the loan amount

15 year Loans Greater than $625,500

  • Loan to value less than 90 percent, the premium is 0.70 percent
  • Loan to value greater than 90 percent, the premium is 0.95 percent

For example, if the loan amount is $200,000, is a 30 year loan with less than five percent down the annual premium is 1.35 percent of $200,000, or $2,700 then divided by 12 to get a monthly amount. In this example the monthly premium is $2,700 divided by 12, or $225.

MIP Cancellation

Similar to mortgage insurance on conventional loans, FHA MIP can be cancelled once the home loan reaches 78 percent of the original purchase price and the mortgage insurance has been paid for a minimum of five years. With both conditions present, MIP can be cancelled.

However, recent changes eliminate this automatic cancellation for all FHA loans that are issued FHA case numbers after June 3, 2013. An FHA case number is a number assigned to an FHA loan when a loan is officially assigned FHA status. Case numbers are assigned each FHA loan application when the lender first produces an FHA loan application. Avoid permanent FHA mortgage insurance and apply with us before the June 3, 2013 cutoff..

Most FHA loans with case numbers dated June 3, 2013 and beyond will not be eligible for MIP cancellation. FHA mortgage insurance will need to be paid for the life of the loan on any FHA loan with a starting loan-to-value (LTV) of greater than 90%. Most FHA loans start at higher than 90%, as most people opt to put just 3.5% down.

Loans with 90% or less LTV will need to pay mortgage insurance for 11 years.

The only way to remove FHA mortgage insurance on loans with greater than 90% LTV after June 3, 2013 will be to refinance into a conventional loan, assuming enough equity is in the home to do so.

Yet even with these recent changes regarding MIP cancellation, the FHA mortgage is still considered one of the best available loan types for those with little money for a down payment.

This is a big shift, since previously, FHA mortgage insurance could be cancelled when the loan balance reached 78% of the original value, and it had been paid for at least 5 years.

Questions and Answers about FHA Mortgage Insurance

I heard that mortgage insurance for FHA loans is tax deductible, just like mortgage interest. Can I deduct mortgage insurance from my income taxes?  All tax related questions should be forwarded to a tax professional but in general, yes, mortgage interest is considered a tax deductible item for income tax filers who itemize on their returns.

Should I apply for an FHA mortgage now before June 3 of this year?  If you’re considering buying a home now and using an FHA mortgage, be sure and apply before the June 3 deadline and make certain your FHA lender gets a case number assigned before that date. Apply here.

I have an FHA loan, can I get my mortgage insurance premium cancelled?  As long as your current FHA loan meets current cancellation requirements, yes. All FHA loans with case numbers assigned after June 3 will not be eligible for MIP cancellation.

Why do borrowers ever pay the upfront premium out of their own pocket, why don’t they add it to the loan?  Very few do. If borrowers have enough money to pay for UFMIP they typically apply those funds to a down payment and closing costs. FHA loans are popular because of the low down payment requirement and the ability to finance the UFMIP.

I’m Ready to Apply for my FHA Loan

Talk to one of our FHA professionals at the phone number above or by completing our free, no-obligation quote form.