The FHA offers a flexible program for buyers with at least a 580 credit score and 3.5% of the purchase price to put down on a home. You don’t have to be a first-time homebuyer to use the FHA program; anyone that qualifies can use it.
If you choose FHA financing, you will pay two types of mortgage insurance premiums – upfront mortgage insurance and annual mortgage insurance. Both types are required every time you take out an FHA loan.
How Much is Upfront Mortgage Insurance
The upfront mortgage insurance is a fee based on your loan amount. Today, the FHA charges 1.75% of the loan amount. If you borrow $200,000, you would pay $3,500 at the closing. If you don’t have the cash to pay at the closing, you can wrap the fee into your loan amount. You don’t have to worry about LTV requirements or the county loan limits when it comes to the upfront mortgage insurance either.
The Exception to Upfront Mortgage Insurance
The FHA also offers refinancing options for borrowers. If you have a current FHA loan, you may be able to refinance it with very little verification. The FHA streamline loan allows current FHA borrowers to secure a lower rate, lower payment, or better term all while only verifying their mortgage payment history and proving there is a benefit to the new loan.
If you qualify for the streamline refinance, you may not have to pay the full upfront mortgage insurance amount. This is the case if you refinance within the first three years of taking out the FHA loan. The FHA will give you a ‘refund’ of your upfront mortgage insurance that you paid on the original loan. They base the refund on the number of months you’ve had your current FHA loan. The longer you wait, the lower the premium becomes.
You may refinance your FHA loan as soon as six months after taking out the original loan and up to 36 months after taking it. The refund starts at 70% and ends at 10% by the 36th month. The refund you receive directly reduces the amount of premium you owe on your refinanced FHA loan.
How Much is Annual Mortgage Insurance Premium
In addition to the upfront mortgage insurance premium, the FHA charges annual mortgage insurance. The FHA charges the lender that holds your loan the premium once a year. But the lender will divide that fee up amongst the 12 monthly payments you make on your mortgage payment. This helps make the insurance more affordable for you.
Right now, the annual mortgage insurance on a standard FHA loan with 3.5% down is 0.85% of the loan amount. On a $200,000 loan, that means $1,700 per year or $142 per month. The amount will decrease slightly each year as you pay your principal balance down.
The FHA does have various rates for borrowers that make different down payments than the standard 3.5 percent:
- Down payments of 5% or less and loan amounts less than $625,500 pay 0.85%.
- Down payments between 5% and 10% with a loan amount less than $625,500 pay 0.80%
- Down payments of 10% or more with a loan amount greater than $625,500 pay 0.80% (for 11 years)
- Down payments of 5% or less and loan amounts greater than $625,500 pay 1.05%
- Down payments between 5% and 10% with a loan amount greater than $625,500 pay 1.0%
- Down payments of 10% or more with a loan amount greater than $625,500 pay 1.0% (for 11 years)
These figures pertain to a 30-year loan, which is the most common with FHA loans.
If you opt for a 15-year term, you’ll pay the following fees:
- Down payments of 5% or less and loan amounts less than $625,500 pay 0.70% in annual mortgage insurance
- Down payments of more than 5% and loan amounts less than $625,500 pay 0.45% (for 11 years)
- Down payments less 10% and loan amounts greater than $625,500 pay 0.95%
- Down payments between 10% and 22% and loan amounts greater than $625,500 pay 0.70% (for 11 years)
- Down payments greater than 22% and loan amounts greater than $625,500 pay .045% (for 11 years)
The typical FHA borrower pays FHA annual premium for the life of the loan. This differs from conventional loans, where you pay Private Mortgage Insurance as long as you owe more than 80% of the home’s value. If the home appreciates or you pay the value down below 80%, you may request elimination of the PMI.
FHA loans don’t allow elimination of the mortgage insurance. The only exception is those loans noted above, that are only required to pay PMI for the first 11 years of the loan.
If you don’t qualify for the 11-year temporary MIP, you’ll pay the insurance for the loan’s term. If you want to eliminate it, you would have to refinance out of the FHA loan and into another loan program, such as the conventional loan.
This is a common step for many FHA borrowers. They take the FHA loan when they buy the home because they have less than perfect credit or don’t have more than 3.5% to put down on the home. As time passes and their credit score increases, though, they are able to refinance into a conventional loan once they owe less than 80% of the home’s value. They can then eliminate the mortgage insurance requirement.