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FHA Loans - Mortgage Insurance

July 26th, 2007 by John Thomas

FHA does not fund loans directly; rather, it provides a guarantee to the lender against default.
There are two separate fees that HUD collects to provide a level of guarantee coverage to the lender:

  1. Up-front mortgage insurance premiums (UFMIP).
  2. Monthly renewal mortgage insurance (monthly MI).

The up-front mortgage insurance premium, if required, will be 1.5% of the base loan amount. This can be added directly on top of the base loan amount to determine the total loan amount, regardless of initial loan amount or appraised value. MI can always be added to the maximum base mortgage amount.
Some loan options do not require up-front MI premiums; however, a 2% funding fee is charged. These loan types include:

  • Section 234c loan - Approved condominium projects.
  • Section 203k loan - Purchase or refinance transactions to rehabilitate, refurbish, or upgrade property and not charged with a 1.5% funding fee.
  • Section 184 or 284 loans - Native American loans with no 1% up-front funding fee and no monthly MI, rather than the standard 1.5% up-front funding fee (similar to a VA or department of veteran’s affairs insured loan).
  • Section 255 loan - Reverse mortgages that allow seniors to extract equity from their home without the burden of repayment.

Monthly mortgage insurance premiums for loans closed after January 1, 2001, are refundable through the 5th year of the loan based on certain percentage increments. For example, if a borrower sells or refinances after having the property or the loan for 36 months, the borrower is entitled to a partial refund of the original FHA up-front mortgage insurance premiums.
The annual renewal premium, also referred to as the mutual mortgage insurance premium in the HUD mortgage insurance premium policy, is 0.5% per year divided by 12. This is included in the borrower’s monthly payment. Some loans have annual premiums that are different from the standard 0.5%. Fifteen year or shorter amortization loans that have 90% or greater LTV have a 0.25% annual renewal premium. A 15-Year or shorter note has less than 90% LTV at its onset with no monthly mortgage insurance premium fee. Section 255 (reverse mortgages), Section 247 (Native Hawaiian), or Sections 184/284 (Native American) loans are not charged monthly mortgage insurance premiums.

The HUD annual renewal premium MI will remain on the loan for five years or until the loan has reached 78% LTV, per the original purchase price or appraised value.  The borrower will pay the monthly mortgage insurance for up to five years regardless of their initial LTV, unless they refinance or sell that loan in less than five years.

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