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Understanding FHA mortgage insurance

Yahoo Personal Finance· Getty Images
Updated 3 min read

If you are purchasing a home using a Federal Housing Administration (FHA) loan, you will have to pay FHA mortgage insurance premiums (MIP) as a condition of the loan. Like private mortgage insurance on conventional loans, FHA MIP protects the FHA lender from the risk of borrower default.

FHA loans have lower credit score requirements for borrowers than conventional loans, which means buyers using these loans have a higher risk of default. This is why mortgage insurance is a requirement for FHA loans.

Here’s what you need to know about FHA mortgage insurance.

Learn more: FHA cash-out refinance — Requirements and guidelines

You will have to pay your FHA MIP in two ways:

  1. An upfront mortgage insurance premium (UFMIP) due at closing.

  2. An ongoing annual MIP paid in monthly installments with your mortgage payment.

Read more: What is mortgage insurance, and how much does it cost?

The UFMIP payment is set at 1.75% of the loan amount. For instance, let’s say you are purchasing a $200,000 home and putting down 3.5%, or $7,000. Your loan amount will be $193,000, which means your UFMIP will be 1.75% of $193,000, or $3,377.50.

You have two options for paying the UFMIP:

  1. Pay it in cash at closing.

  2. Have the premium amount financed into the loan amount. While rolling your UFMIP into the mortgage loan reduces your out-of-pocket FHA loan closing costs, it does increase the cost of your mortgage.

Read more: FHA Streamline Refinance — how does it work, and who is eligible?

Your ongoing MIP payment amount is typically paid in equal monthly installments along with your monthly mortgage payment. Your cost depends on a number of factors, including the loan amount, the loan-to-value ratio, and the loan term.

The cost of your annual MIP is described in basis points (bps), which are each worth 1/100th of 1%. That means 1 basis point is equal to 0.01%. The following FHA MIP chart breaks down the exact bps you will pay with terms longer than 15 years.

Here’s how it would work for a $200,000 home:

  • A 3.5% down payment of $7,000 means you have a loan amount of $193,000 and a loan-to-value ratio of 96.5%.

  • This means your annual MIP would be set at 0.55% of your balance.

  • 0.55% of $193,000 equals $1,061 for year one, or approximately $88 per month.

Tip: FHA MIP for loans with shorter than 15-year terms have a lower bps than those with terms longer than 15 years. If you are interested in the FHA MIP costs for shorter term loans, you can find more information on the HUD website.

Learn more: Pros and cons of FHA loans

You can get rid of private mortgage insurance on a conventional loan once you reach a specific equity milestone, but FHA MIP can potentially last the entire mortgage term. Borrowers who put down less than 10% can expect to pay the annual MIP for the entire life of the loan.

Learn more: How does title insurance work?

If you put down 10% or more as a down payment, however, you will only have to pay FHA MIP for 11 years before the FHA mortgage insurance is canceled.

The good news is that as you pay down your mortgage, your annual MIP will go down. Though you will pay the same bps throughout, it will be a percentage of a smaller balance each year, lowering your monthly MIP payment.