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FHA Mortgage Insurance Guidelines On FHA Loans Required By Borrowers

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FHA Mortgage Insurance Guidelines On FHA Loans Required By Borrowers

This BLOG On FHA Mortgage Insurance Guidelines On FHA Loans Required By Borrowers Was Written By Michael Gracz NMLS 1160212

FHA mortgage insurance guidelines can be hard to understand.

  • And as referenced in the 4000.1 HUD handbook the rules have recently changed on mortgage insurance premiums
  • FHA loans are very attractive to many borrowers due to the low down payment needed and more lax credit requirements
  • Some families do shy away due to mortgage insurance
  • So what is mortgage insurance?

What Is Mortgage Insurance Per FHA Mortgage Insurance Guidelines

Mortgage insurance is in insurance policy that protects the lender or investor in case of default.

  • More simply stated, the mortgage insurance will pay the lender the remaining balance if and when an insured loan defaults
  • Home Buyers may be asking what does mortgage insurance do for you?
  • The answer is quite simple, nothing
  • It is an instrument that protects the lender and usually allows borrowers to enter into a loan they may have not qualified for without the extra insurance
  • Since this article is focusing on an FHA mortgage insurance we will go into more detail now

Types Of Mortgage Insurance 

FHA Mortgage Insurance Guidelines require two types of mortgage insurance:

  1. upfront mortgage insurance premiums
  2. monthly mortgage insurance premiums

FHA loans do have both mortgage insurances associated with them.

  • Unlike conventional financing, FHA mortgage insurance premiums do not change based on credit score
  • They do change slightly depending on the down payment and term of the FHA Loan
  • So how are they calculated?

How Is Mortgage Insurance Calculated

Before we can explain the true cost of mortgage insurance it is important to understand the term basis point.

  • One basis point is equal to 1/100 of a percent or .0001 in decimal form
  • Basis points usually describe changes in bond yields or interest rates
  • As you can tell this term is used in the finance industry quite frequently

Let’s give a few examples before we move on.

  • 100 basis points is equal to 1%
  • 125 basis points is equal to 1.25%
  • 1000 basis points is equal to 10%

Mortgage Insurance Premiums

Upfront Mortgage Insurance

Upfront mortgage insurance premium most commonly abbreviated as UFMIP is always calculated off the loan amount.

  • All FHA mortgages in 2018 have 175 basis points or 1.75% of the base loan amount as an upfront mortgage insurance premium
  • The only exception for this rule are for homes located on Indian lands, please see section 248 of the HUD 4000.1 FHA Handbook for more information
  • What does this mean for me and obtaining my FHA loan?
  • The answer is not much
  • This upfront mortgage insurance premium can be paid out of pocket
  • But most borrowers choose to roll this mortgage insurance premium into their total loan amount
  • That is allowed per FHA Guidelines
  • Choosing to finance this premium into your loan will result in a slightly higher monthly payment and a higher overall cost of your loan
  • Please keep in mind this is the most common way borrowers enter into an FHA loan

Let’s give an example;

  • Say you want to buy a home for $200,000 with a 30 year FIXED FHA loan
  • You will put down the 3.5% required down payment
  • You have selected to roll the upfront mortgage insurance premium into your loan

$200,000 (base loan amount) * 175 basis points (UFMIP) = $203,500 (total loan amount)

  • In this example you will pay 85 basis points as your annual mortgage insurance premium
  • As you put down less than 5% and choose a 30 year term
  • Reference above chart

As stated above FHA mortgages also include a monthly mortgage insurance premium.

  • Unlike private mortgage insurance, the FHA annual mortgage insurance is paid directly to the Federal housing in ministration on a monthly basis
  • This provides funding for the FHA
  • Monthly FHA mortgage insurance used to cancel itself out a very similar way to PMI
  • Unfortunately, this has now changed
  • On the bright side the monthly cost associated with the mortgage insurance has gone down from 105 basis points to 85 basis points when putting down less than 5% for loan amounts below $625,000
  • In today’s raising rate environment, FHA mortgage insurance premiums are typically lower than PMI for lower credit score borrower
  • Making the FHA loan a very attractive option

FHA Mortgage Insurance Guidelines On FHA Loans Versus Conforming Loans

Do you have to pay mortgage insurance? The answer is no as long as borrowers qualify for a conventional mortgage and have at least a 20% down payment. If borrowers do not have 20% down, they can always use an FHA loan to buy a home and down the road refinance into a conventional loan to eliminate mortgage insurance. This is one of the most popular reasons to refinance.

Please contact the expert at Gustan Cho Associates Mortgage Group, Mike Gracz on 630-659-7644. He will be able to answer any questions regarding FHA Mortgage insurance. Mike Gracz can also assist with conventional, VA, Jumbo, and even NON QM loans. If you are located in a state where Mike Gracz is not licensed, another member of the Gustan Cho team can help. With years of expertise there are few situations that we have not come across. Feel free to reach out to receive a personal one on one consultation.

About The Author Michael Gracz

Michael Gracz is the author of this blog, FHA Mortgage Insurance Guidelines. Mike Gracz is a senior writer/contributing editor for Gustan Cho Associates Mortgage News and the National Sales Manager and Senior Loan Officer at Gustan Cho Associates. Michael is a veteran mortgage professional and is an expert in government and conventional loans. Mike Gracz has helped countless of home buyers nationwide who could not qualify at other lenders. MIchael Gracz’s business model at The Gustan Cho Team is not having any overlays on FHA, VA, USDA, and Conventional Loans. He is also an expert on non-qm loans and bank statement loans for self employed borrowers. Michael is available 7 days a week, evenings, weekends, and holidays. Please contact Michael Gracz at 630-658-7644 or text Mike for faster response.

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