Written By: Stacey Sprain, Op-Ed Writer
One of the most common questions I am asked about FHA lending is if monthly mortgage insurance is required for loans with less than 80% loan-to-value ratio. I am also commonly asked about the up front MIP and if it is required for all circumstances. Let’s take a look at FHA’s mortgage insurance.
FHA Mortgage Insuring Explained
The Federal Housing Administration aka: FHA is the single largest insurer of mortgages in the world. FHA insures mortgages made by FHA-approved lenders on single family homes (which include manufactured homes) and on multi-family homes (which include hospitals). Since FHA’s inception in 1934 it has insured over 34 million properties and has a current portfolio that includes over 4.8 million insured single family mortgages and over 13,000 insured multifamily projects.
FHA mortgage insurance protects lenders against losses that result from homeowners defaulting on their mortgages. Lenders who utilize FHA programs bear less risk because FHA will pay a claim to the lender in the event of a defaulted home loan. However, loans must meet certain requirements and criteria to qualify for the FHA loan program and its insurance.
A major fact of interest regarding FHA is that it is the only government agency that operates entirely from its own self-generated income- it costs taxpayers nothing. All mortgage insurance proceeds paid through borrower’s monthly mortgage payments are captured in an account that is used to operate FHA loan programs in their entirety. The Federal Housing Administration provides economic stimulation to the U.S. through its community development functions which create jobs for many persons employed in housing-related fields.
FHA Mortgage Insuring Rates & Limits
Currently FHA requires that an up front mortgage insurance premium fee of 1.5% of the base loan amount be charged to borrowers on FHA loans. This fee is referred to as up-front MIP. The up-front MIP may be paid in cash, paid by seller credit or may be financed by the borrower. In most cases, the MIP is financed by the borrower meaning that 1.5% of the base loan amount is added to conclude a total loan amount.
FHA also requires a monthly mortgage insurance payment based on a premium rate of .50% for 30 year mortgages and .25% for 15 year mortgages based off the total loan amount of the loan.
The only circumstance where a monthly mortgage insurance payment is not required would be in the case of a 15 year mortgage with a loan-to-value of less than 90%.
The following rules apply to the cancellation of FHA mortgage insurance:
On loans closed on or after January 1, 2001, FHA's annual mortgage insurance premium will automatically be canceled-once the unpaid principal balance, excluding the upfront premium, reaches 78% of the lower of the initial sales price or appraised value. The 78% is based on the initial amortization schedule, and does not take account of extra payments. This cancellation rule applies only to FHA's mainstream insurance program. It does not cover mortgages on condominiums or Section 203(k) rehabilitation loans, among others.
Borrowers who have made additional payments to principal must take the initiative, through their lender, to have the insurance terminated using the 78% rule.
The insurance must be in force for at least 5 years regardless of loan-to-value limitation.
Following is a standard chart of FHA mortgage insurance rates and requirements:
FHA up-front MIP and monthly mortgage insurance percentages for FHA home loans under the 203b program:
For 30 year loans originated after January 1, 2001
Upfront MIP LTV Monthly MI Minimum Term
1.50% 95.01-MAX MTG 0.50% 5 YRS
1.50% 90-95% 0.50% 5 YRS
1.50% 0-89.99% 0.50% 5 YRS
For 15 year loans originated after January 1, 2001
Upfront MIP LTV Monthly MI Minimum Term
1.50% 95.01-MAX MTG 0.25% 5 YRS
1.50% 90-95% 0.25% 5 YRS
1.50% 0-89.99% 0% 5 YRS
About The Author
Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution.