FHA - Upfront MIP

FHA Upfront MIP

According to the FHA loan, you have to keep a down payment of 10%. If the down payment is not less than 10% then you have to pay mortgage insurance premium. If for some reason you are unable to repay the loan or default, this insurance will provide protection to the lender.

FHA loan is convenient for buyers because it comes with less requirements. These closing costs and competitive interest rates are much lower than other conventional loans.

What is FHA mortgage insurance (MIP)?

The purpose of mortgage insurance premium is to provide financial protection to the lender. If you do not have at least 20% downpayment then you have to pay premium. This mortgage insurance is backed by FHA so if you default for any reason, this insurance provides financial assistance to the lender.

There are 2 types of insurance offered by the lender to the borrower:

  • Upfront mortgage insurance
  • Annual mortgage insurance

Up-Front Mortgage Insurance

The purpose of Up-Front Mortgage Insurance is to protect the lender from losses. Borrowers are more likely to default when they have less equity in their home. They may also plan to move too fast or lose their home through foreclosure from the bank. Since their home equity is low, they have nothing left to lose through foreclosure. So if you leave home or stop making monthly payments, your mortgage insurance will compensate the lender.

The minimum down payment required for an FHA loan is 3.5% of the home price tag. Monthly payments and credit scores are required less than conventional loans.

The amount of up-front mortgage insurance is 1.75% of the total loan. However, this may vary depending on the FHA loan program. For example, 0.55% up-front mortgage insurance is required for FHA streamline refinancing loans.

However, you can pay this insurance in cash at the time of closing. However, if you do not want to pay in cash, it can roll with your total debt.

In addition to up-front mortgage insurance, another insurance charge is the mortgage insurance premium which ranges from 0.45% to 1.05% of the total loan. However, the term of this insurance is much longer, that is, you have to pay up to the loan-to-price ratio.

You do not have to pay this insurance after paying a certain amount of your mortgage. You have to pay this insurance up to 20% equity, so if you default, the lender will have less loss. Then you don’t have to pay any kind of insurance, you just have to pay monthly.

Those with a loan life of 15 years will have to pay monthly insurance for up to five years. The 78% loan-to-value ratio will be required if your mortgage is less than five years.

Special consideration

Refunds are likely if the borrower pays up-front insurance premiums and sells the home within 5 to 7 years of ownership. Simply put, the borrower is likely to get a refund even after a few years.

If the borrower has received FHA loan before 2013, they are eligible to receive or cancel up-front insurance premium after 5 to 7 years. However, this will be possible only when the borrower pays the monthly payment on time and 20% equity is available in his house.

Those who get FHA loans after 2013 will have to restructure through conventional loans. Also their loan-to-value must be 80 percent or less. 

Tips to Avoid Paying Up-Front Mortgage Insurance

Up-front mortgage insurance may seem expensive to borrowers, but there are some ways to avoid this expensive insurance.

Apply for a conventional loan: Conventional law does not require UMIP payment. Refinancing or home purchase will require 80% or less of the cost.

Make at least 20% down payment: If you make a downpayment of 20% or more, it is risky for the lenders. Most lenders will not want to take such a risk. Make a down payment of less than 20% to get a home loan.

Get Second Mortgage: If your down payment is 5 percent then you will get a second mortgage with 15 percent down payment. If the down payment is 10% then you will need a second mortgage of 10% down payment. Above all, a minimum of 20% payment is required for mortgage insurance.

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