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FHA Mortgage Insurance Overview
The FHA Mortgage Insurance Premiums, mostly commonly referred to as MIP, are charged by HUD to protect investors against default. Using these premiums paid into a fund, HUD Guarantees the performance of every FHA Loan and protects a percentage of the lender’s investment. In return, this mandatory premium enables borrowers who might not otherwise fit within Freddie/Fannie conventional guidelines, to receive funding for the purpose of Buying A Home or Refinancing at conventional Mortgage Rates.
The net affect of the premiums on your loan are not that much different than the more traditional PMI premiums charged on a conventional mortgage. If you compare them, you’ll find that the monthly MIP payment with the FHA mortgage is typically less than half the cost of PMI. What many borrowers are usually concerned with is the upfront MIP which is added into the loan at financing.
FHA has several types of Mortgage Insurance. Depending on the type of property and the type of loan transaction, one or more of these insurance types may apply to your situation.
Mutual Mortgage Insurance (MMI):
Applies to 1-4 unit houses and eligible PUD’s for both Fixed Rate and ARM transactions. (HUD program codes: 203b (fixed rate) and 251 (ARM). Within this MMI fund, there are 2 kinds of mortgage insurance that may apply to the transaction: Upfront MIP and Monthly MIP:
- Upfront mortgage Insurance (UFMIP) is the one time mortgage insurance premium collected at closing and is sent to HUD to insure the loan. Currently, UFMIP is calculated at 1.75 % X the base loan amount.
- UFMIP may be paid in cash at closing and may be paid by the Borrower, Seller, or Lender.
- UFMIP may be financed in the mortgage amount. If financed, the UFMIP is added to the base loan amount to arrive at a greater “total” loan amount.
- The total loan amount is the principal amount that the Borrower repays in the mortgage payment each month. The total loan amount may exceed FHA’s statutory (locality) lending limit only by the amount of the financed UFMIP.
- The Borrower may obtain a partial refund of the UFMIP if the loan is refinanced to another FHA mortgage within the first 3 years of term. If the loan is paid off and/or not refinanced to another FHA mortgage, there will be no refund of the UFMIP.
General Insurance Fund (GI):
- Applies to 1 Unit Condo properties. Loan transaction may be for both Fixed rate and ARM products.
- HUD program code is Section 234c (Condo-Fixed Rate) OR Section 251 (Condo- Arm Loan).
- Monthly mortgage insurance is paid monthly in the Borrower’s mortgage payment. Servicer sends the payment to HUD on monthly basis.
- Insurance is paid by Borrower for entire term of loan (regardless of the LTV).
- Current monthly mortgage insurance is calculated by multiplying the base loan amount X .50% divided by 12.
- Borrower receives NO refund on this type of insurance when the loan is paid in full.
|Cancellation of FHA’s Annual Mortgage Insurance Premiums
The cancellation policies previously defined remain unchanged.
ANNUAL PREMIUM (Monthly mortgage insurance):
General Insurance Fund (GI):
First-Time Homebuyer with HUD-Approved Pre-Purchase Counseling
The National Housing Act, as amended by the Housing and Economic Recovery Act in 2008, authorizes upfront premiums of up to 3.00 except these premiums cannot exceed 2.75 percent for first-time homebuyers who complete HUD-approved pre-purchase counseling. Since the upfront premium rate of 1.00 percent remains below the statutory cap, no variable rate is provided for under this Mortgagee Letter for first-time homebuyers who receive HUD-approved counseling.
Every HUD loan is subject to the upfront MIP premium. The upfront mortgage insurance premium rate for purchase, refi, and cash out is 100% of the loan amount. Streamline refinance loans are also 1.00% upfront MIP.
All programs but the 15 year loan (see below), are subject to either .85% to .90% annual premium paid monthly for a mandatory minimum of 5 years. After 5 years, if the LTV is less than 78%, the monthly premiums will no longer apply and it is automatically removed.
15 year loans with an LTV grater than 90% have a monthly MIP factor (FHA MIP factor) of .50 (50 basis points). 15 year loans with an LTV that is less than 90% have a monthly MIP factor of .25 (25 basis points) if the loan-to-value ratio is less than 90%. Otherwise, MIP payments are required until the LTV is less than 78%.
If Refinancing an existing FHA mortgage that is not a streamline refi, the upfront MIP will be pro-rated and credited at close towards your new MIP upfront fee — based upon the number of years you have paid on your loan up to 5 years. Monthly MIP still applies, based upon the above criteria.
Reference: For information on automatic cancellation of Annual Mortgage
Case numbers should be requested and cancelled in accordance with prudent
Note: See Appendix I of this Mortgagee Letter for a screen shot of the
Attached is an appendix that provides examples of the system enhancements
Please address any questions about the topics in this Mortgagee Letter to the FHA
David H. Stevens
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Ben worked with us when we were buying a home and I was particularly impressed with how quickly he always responded, even at odd hours. He was a pleasure to work with and we have already recommended him to friends.
Ben was courteous, professional, and knowledgeable. He had our best interest at heart through our entire home buying process and never pressured us. I would recommend him to anyone who is looking to buy or refinance a home.