Upfront mortgage insurance is just one of the insurance premiums you will pay when you take on a new FHA loan. This insurance gets paid at the beginning of the loan and is a one-time fee; once you pay it at the closing (unless you finance it), you are done; you do not pay it again. This mortgage insurance money goes directly into a reserve account that the FHA holds in order to be able to guarantee FHA loans. If a lender were to come to the FHA and state that a particular borrower defaulted on their loan and now they had to foreclose on it, the FHA is supposed to guarantee the lender those funds, which is why the mortgage insurance premium is charged.
Different from Annual Mortgage Insurance
The FHA upfront mortgage insurance that you pay is different than the annual mortgage insurance you will pay for the life of the FHA loan. The annual premium is similar to PMI on a conventional loan – you pay it on a monthly basis with your mortgage payment. The difference with the FHA insurance is that it never goes away – you pay this premium for the life of the loan. If you want to stop the insurance premiums, you would have to refinance into a conventional loan once you hit a loan-to-value ratio lower than 80%.
When you Pay FHA Upfront Mortgage Insurance
FHA Upfront mortgage insurance, as the name suggests, is strictly paid at the closing. You pay it before you even take on the loan. You can pay it in cash at the closing or you can finance it into your loan without it affecting your loan-to-value ratio. Lenders figure out the 97.5 percent that you are eligible to receive, if you have a credit score higher than 580, and then add on the UFMIP if you wish to roll it into your loan costs. You would then have a slightly higher mortgage payment because the UFMIP would be added to your principal, interest, taxes, homeowner’s insurance, and annual mortgage insurance.
You can Get FHA UFMIP Back
There is one circumstance that enables you to get your UFMIP back. This only occurs when you refinance your current FHA loan into a streamline FHA loan. This is typically done when interest rates get much lower than they were when you took out your original FHA loan. If you want to take advantage of the lower rate and save money every month, the FHA enables you to go through a streamline refinance program which requires you to verify very little and enables you to get a refund on your UFMIP. The refund you receive is based on the length of time you held the original loan. You are not eligible to refinance into a streamline loan until you have made 6 payments on your current FHA loan. After the sixth month, you are able to refinance and get 70 percent of the upfront premium that you paid back. The amount you receive will go directly to the new upfront mortgage insurance premium that you will be charged on your new FHA loan. The amount you receive back comes down 2 percent for every month that passes. For example, on the 7th month you get 68 percent back; 8th month 66 percent and so on until you reach the 36th month where you get 10 percent back and which is the last month to get a refund.
UFMIP is not your Down Payment
It is important to realize that the UFMIP is not your down payment and it cannot be considered any part of it. The mortgage insurance premium is completely separate from the 3.5 percent that you must put down. If you have a credit score that is lower than 580 and higher than 500, you will have to put down 10 percent of the sales price of the home, of which none of it can be considered the down payment. Let’s look at an example:
- If you are purchasing a home for $200,000, you would be required to put down $7,000 if you have a credit score over 580. If you have a credit score between 500 and 580, you would be required to put down $20,000. On top of those numbers, you would be required to bring $3,500 to the closing table or the UFMIP. If you cannot pay that amount out of pocket, you could request to roll it into the loan.
You Pay UFMIP on Every FHA Loan
If you paid UFMIP on one FHA loan, you will still be required to pay it on any subsequent FHA loans that you receive. This is true even if you refinance into another FHA loan. As stated above, if you use the streamline refinance program, you can get a refund of the premium you paid on the original loan, but any other FHA loan will not give you the refund. You will have to pay the premium all over again in an effort to stack the reserved funds that the FHA has to continue giving out these loans.
The FHA upfront mortgage insurance and annual mortgage insurance might seem like an added cost, but it is a convenience that the FHA provides you with by giving you access to these loans. Without FHA loans, fewer borrowers would get approved for a mortgage because they have more flexible guidelines and competitive rates. You can think of the cost as an insurance policy to help you become the homeowner that you wanted to be. Without the premiums, FHA loans might not exist. This cost is not negotiable, so hopping from lender to lender will not change that cost, but it will help you find the best rate, term and closing costs to help make your home purchase as affordable as possible.