FHA loans are an excellent option for anyone looking to purchase a home but worried about meeting the requirements for conventional lending. Because the Federal Housing Administration backs these loans, they have more lenient requirements, and you can get approved with a down payment of as low as 3.5%.
FHA loans have a downside, though. Unlike other types of lending, all FHA loans require mortgage insurance. Keep reading as we explore FHA loan mortgage insurance and how it can affect your monthly payment.
One of the biggest misconceptions about mortgage insurance is that it’s called private mortgage insurance (PMI) across all types of loans. However, PMI only refers to mortgage insurance on conventional loans. Mortgage insurance on FHA loans is called Mortgage Insurance Premiums (MIP).
If you purchase a home with an FHA loan, you are responsible for two types of mortgage insurance - upfront mortgage insurance and annual mortgage insurance. Let’s explore both.
When using an FHA loan to purchase a home, borrowers are required to pay UFMIP at closing, equal to 1.75% of their loan amount. How you pay this fee depends on the lender. Some allow you to roll it into your loan amount, while others require you to pay it at closing.
In addition to UFMIP, you are required to pay MIP on all FHA loans, regardless of the size of your down payment. Each year, you pay MIP as monthly installments added to your mortgage payment. While the UFMIP is a flat rate for all borrowers, MIP amounts fluctuate based on your loan size and loan-to-value (LTV) ratio.
See below for a chart to help you understand how much you would pay for MIP.
The amount you would pay for MIP depends on the size of your loan and down payment. Below is a breakdown of your exact MIP amount and the duration required to continue paying.
| Loan Amount | LTV Ratio | MIP | Duration of MIP |
|---|---|---|---|
| $726,200 | 90% or less | 0.50% | 11 years |
| 90% to 95% | 0.50% | Entire loan term | |
| 95% or more | 0.55% | Entire loan term | |
| Over $726,200 | 90% or less | 0.70% | 11 years |
| 90% to 95% | 0.70% | Entire loan term | |
| 95% or more | 0.75% | Entire loan term |
| Loan Amount | LTV Ratio | MIP | Duration of MIP |
|---|---|---|---|
| $726,200 and less | 90% or less | 0.15% | 11 years |
| 91% or more | 0.40% | Entire loan term | |
| Over $726,200 | 78% or less | 0.15% | 11 years |
| 79% to 90% | 0.40% | 11 years | |
| 91% or more | 0.65% | Entire loan term |
As the chart above shows, anyone taking out a loan today with a down payment of less than 10% will be required to make MIP payments for the life of their loan. Down payments greater than 10% will pay MIP for 11 years.
However, this hasn’t always been the case. Over the past several decades, the FHA has changed its guidelines on how long MIP is required. If you have an older FHA loan, here’s an overview.
| Loan Origination Date | Duration of MIP |
|---|---|
| July 1991 to December 2000 | Entire loan term |
| January 2001 to June 3, 2013 | 5 years or once your LTV reaches 78% |
The big draw to FHA loans for many borrowers is that they’re available to people who might not qualify for conventional lending. This could be due to a lower credit score or a smaller down payment. Because this creates risk, MIP is required to help lenders mitigate this risk as much as possible.
FHA loans make it possible for people who might not qualify for a conventional loan to become homeowners. However, this comes at a cost. The annual MIP is going to increase your monthly housing payment.
Before proceeding with an FHA loan, it’s crucial to calculate the numbers to ensure you can comfortably afford your payments. Here’s a breakdown of how much it could cost you.
Suppose you purchase a home with a $400,000 30-year loan and a 3.5% down payment. Your UFMIP would be $7,000, and your annual MIP would be $183.33 each month (0.55% of $400,000).
Once you understand MIP's impact on your monthly payments, you can decide whether to proceed with an FHA loan.
Paying for MIP each month is something most people would prefer to avoid. Unfortunately, if an FHA loan is your only option, you might have to pay it to buy a home.
Luckily, there are ways to cancel MIP. However, certain things must happen. Let us explain.
Earlier, we showed you a couple of tables laying out the duration you’ll continue paying MIP. If you use a down payment of more than 10%, you can cancel MIP after 11 years. Down payments of less than 10% typically require keeping MIP for the life of the loan.
However, there is another way to cancel MIP on an FHA loan.
If your credit score has improved and your home has gained enough equity to have an LTV ratio of less than 80%, you can refinance to a conventional loan and no longer pay mortgage insurance.
The UFMIP can be significant, depending on the size of your FHA loan. In our earlier example, it was $7,000 on a $400,000 loan. Luckily, most lenders allow you to pay the amount at closing or roll it into your loan.
However, if you roll it into your loan, you should consider that this will increase your loan balance, and you’ll pay interest on the UFMIP amount, which means an increase in your total borrowing costs.
While many people think FHA MIP and conventional PMI are the same, you should be aware of some differences.
| FHA MIP | Conventional PMI | |
|---|---|---|
| Duration | Down payments of less than 10% require MIP for the life of the loan; down payments of 10% or more require MIP for 11 years | PMI can be canceled once you reach an 80% LTV, or it will be automatically canceled once you reach a 78% LTV. |
| When is it Required? | All FHA loans | Any conventional loan with an LTV above 80% |
| Upfront Costs | 1.75% of the loan amount | None |
| Annual Costs | Between 0.15% and 0.75% | Between 0.10% and 2.00% |
| Payment Options | Paid as part of your monthly mortgage payment | Paid upfront, as part of your monthly mortgage payment, or through a higher interest rate |
If you currently have an FHA loan and you’re thinking about refinancing, you’ll want to consider a few things. Typically, refinancing means you’ll need to pay the UFMIP all over again. However, if you use an FHA Streamline Refinance within three years of closing on your previous FHA loan, you could be eligible to receive a refund of a portion of your original UFMIP. This refund will be applied to your new UFMIP.
Additionally, with an FHA Streamline Refinance, you could qualify for a lower annual MIP amount if your original loan originated before 2023.
15-year loans are less popular than 30-year loans. The biggest reason is because the monthly mortgage payment is significantly higher. However, 15-year loans could be a great option for someone with a sizeable down payment but a credit score that doesn’t meet conventional loan requirements.
Although all FHA loans require an MIP, 15-year loans with a large down payment can significantly reduce costs. With a down payment of at least 22%, the MIP is reduced to just 0.15% and can be removed after 11 years.
Another important consideration when applying for a mortgage is the impact on your taxes. The Further Consolidated Appropriations Act of 2020 was the most recent legislation that allowed you to deduct your MIP payments from your tax return. However, this was only valid for tax years 2018 through 2021. Today, there is no available tax deduction for MIP.
