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FHA Loan Basics: A Reader Question

December 15, 2016

122A reader asks, “I really don’t understand why i have to pay PMI and MIP. I had credit problems a bankruptcy in 2013 , it was recorded and its been almost 4 years and my score is 709 that the middle score i have hardly no debts, 6% of income. I was told I have to pay the MIP up front of 1.75% and also 240 PMI monthly with mortgage. That’s a little too much, is there a way out of this? I also did not want taxes and insurance added, I’m putting 3.5 percent down. My loan officer said I had to pay the insurance and add taxes to my loan.”

It’s not entirely clear from this reader question whether the loan is an FHA mortgage or not, but proceeding under that assumption, let’s clear up a few issues. Among the basic requirements of FHA mortgage loans are the Up Front Mortgage Insurance Premium (UFMIP) which may be paid in cash up front (hence the name) or financed into the loan in full. This mortgage insurance premium is required for most forward FHA mortgages.

Mortgage insurance premiums (MIP) are included as part of the FHA loan mortgage payment. What the borrower refers to as PMI traditionally refers to private mortgage insurance and is not a requirement of FHA mortgages unlike UFMIP and MIP.

Real estate taxes are required to be calculated into the borrower’s monthly mortgage payment. This requirement is found in HUD 4000.1, the FHA loan single family mortgage loan rule book. (More on the total calculated monthly mortgage payment in a moment.)

A borrower is traditionally required to pay a down payment, a minimum required cash investment of 3.5% of the adjusted sales price of the home. The amount of your required down payment may be affected by the borrower’s FICO scores so it’s possible that some borrowers may be required to put down more. Lender standards may apply.

When it comes to how the lender is required to calculate the monthly mortgage payment, let’s examine what FHA loan rules in HUD 4000.1 say:

“The Borrowers total Mortgage Payment includes:

Principal and Interest (P&I);
real estate taxes;
hazard insurance;
flood insurance as applicable;
Mortgage Insurance Premium;
HOA or condominium association fees or expenses;
Ground Rent;
special assessments;
payments for any acceptable secondary financing; and
any other escrow payments.”

This information is found on page 168 of HUD 4000.1.

The reader asks, “Is there a way out of this?” referring to the mortgage insurance, property taxes, and other items added into the monthly mortgage payments. The short answer is no. FHA loan rules require all of the above to be included where applicable. Buying a home includes a set of customary expenses including property taxes, insurance, etc. Home loans are a major financial investment and borrowers should definitely view them as such.

Joe Wallace - Staff Writer

By Joe Wallace

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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