June 13, 2017
“What is mortgage insurance?” is a common question for those new to the home loan process. Do you understand how it works? It helps to define the two things referred to by industry professionals as mortgage insurance. There is mortgage insurance which the borrower pays for as a requirement of the FHA loan, then there is the “mortgage insurance” referred to in FHA loan rules which is something else entirely. Note: What we are discussing here is not hazard insurance, which may be a requirement on some, but not all FHA loans.
FHA Mortgage Insurance For The Lender
The FHA single family home loan handbook, HUD 4000.1, refers to “mortgage insurance” when discussing the FHA’s role in insuring the loan to reduce the risk for the participating lender. On page 130 of HUD 4000.1, we learn the following:
“FHA offers various mortgage insurance programs which insure approved Mortgagees against losses on Mortgages. FHA-insured Mortgages may be used to purchase housing, improve housing, or refinance existing Mortgages.” The mortgagee referred to in the quote is your participating lender.
The FHA insures a percentage of the loan amount so that in cases where the borrower defaults on the loan, the lender won’t take as much of a loss-the government has issued a loan guaranty for a specific amount to be paid to the lender in such cases.
FHA Mortgage Insurance For The Borrower
FHA mortgage insurance is required on most FHA loans. The borrower must pay an amount up front as part of the closing costs of the loan. This amount is commonly known as the Up Front Mortgage Insurance Premium or UFMIP. According to HUD 4000.1, “Most FHA mortgage insurance programs require the payment of UFMIP, which may be financed into the Mortgage. The UFMIP is not considered when calculating the area-based Nationwide Mortgage Limits and LTV limits. The UFMIP charged for all amortization terms is 175 Basis Points (bps), unless otherwise stated…” in the appropriate section of HUD 4000.1
The UFMIP may either be financed entirely into the loan amount or paid entirely in cash as part of closing costs.
There is also an FHA mortgage Insurance Premium (MIP) which is included as part of your monthly mortgage payment. In most cases for new FHA loans today, depending on the LTV ratio, Base Loan Amount and the term of the Mortgage, your MIP requirements will be for either 11 years or the entire duration of the home loan. The amount of MIP payments depends on the same factors that determine the duration of your MIP obligation; LTV ratio, Base Loan Amount and the term of the Mortgage. Your participating lender will explain how she arrives at the monthly payment amount of your MIP.
MIP should not be confused with private mortgage insurance, which is required of many conventional mortgages. Private mortgage insurance (PMI for short) is not required by the FHA.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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