FHA Loans have long been a popular choice for new homeowners, and for good reason. FHA programs allow buyers to have a smaller down payment and have mortgage insurance; combined, these factors offer an opportunity for homeownership that would not have been available for many through more traditional loan options. Many banks and lenders will steer customers towards FHA loans when the bank’s traditional offerings don’t fit what an individual is looking for. The result is that FHA programs have become a go-to option for lenders and homebuyers alike.
Still, any loan has its particular requirements and FHA loans are no different. This article will look at some of the specifics of the FHA program and what they mean for buyers. Items like mortgage insurance and unique homeowner’s insurance requirements can come as a surprise to new buyers or those new to FHA loans, so learning about the programs is essential for prospective buyers looking to get the most out of their investment.
FHA Loan Requirements – Insurance
For those who are entirely new to the process, it is important to note that homeowner’s insurance and mortgage insurance are two entirely separate items. The former insures your home itself in the event of damage or storms, while the latter insures your mortgage to the lender in the event you miss payments and end up in default.
While there are specific FHA homeowner’s insurance guidelines, homeowner’s insurance will be required by any lender in any circumstance. The requirements for homeowner’s insurance on an FHA loan do not differ greatly from those on any other – coverage must be adequate for the home, the correct lenders must be named on the policy, and other basic items.
Mortgage insurance, meanwhile, only applies on loans with a lower down payment percentage than the “traditional” 20%. If you are utilizing an FHA loan to take advantage of a lower down payment, then getting mortgage insurance will be required. That process can be a little more complex than it looks at first glance.
How Much Does FHA Mortgage Insurance Cost?
While mortgage insurance itself isn’t a new concept, FHA’s form of mortgage insurance differs from that of most lenders’ traditional programs and options. Traditional loan programs also require mortgage insurance (PMI) for buyers with smaller down payments, and we’ll dive into those costs below. For now, let’s focus on the FHA mortgage insurance costs.
FHA mortgage insurance is a more fixed, finite element than many traditional PMI offerings. It also requires an upfront payment on the premium, which can raise closing costs significantly. Currently, HUD/FHA has set this premium to be 1.75% of the loan amount. This comes out to $5,250.00 on a $300,000.00 loan. Remember this particular fee is paid upfront, so while you may be pursuing an FHA loan to reduce your down payment, factor in the extra 1.75% when doing so.
That is only the first piece of FHA mortgage insurance, however. After clearing the upfront fee, you still have an annual “Mortgage Insurance Premium” (MIP) that’s factored into your loan payments. This fee ranges from 0.45% to 1.05% of the loan amount annually. For those looking for information on how to calculate the FHA mortgage insurance premium, HUD offers a chart giving a specific breakdown of the annual fees charged.
FHA applies similar guidelines for all of its programs. Mortgage insurance for the 203(h) disaster relief loans, for example, still includes an upfront fee and annual premiums. The primary difference in the program from the basic FHA loans is that 100% financing is available. The mortgage insurance premium calculations and requirements remain the same, however.
FHA Mortgage Insurance Versus Private Mortgage Insurance
All of this may have many buyers wondering if the FHA programs are worth it, given the costs. It certainly warrants a deeper look, but ultimately the situation will be unique to each homebuyer. If you’re not eligible for a traditional loan from your lender, for example, you may be faced with no choice other than FHA. For those with more options, however, it’s worth exploring the differences in cost.
While FHA’s guidelines for pricing mortgage insurance are fairly straightforward, PMI on traditional loan programs can be much more complex. Credit score is a factor and, like mentioned earlier, the rates are quoted from different firms and could vary wildly on a regular basis. PMI has also been known to go as high as 2% or more annually, nearly double the FHA maximum for their premiums. If you have less-than-stellar credit and a large loan amount, odds are PMI will be more expensive than what the FHA is offering.
Removing Mortgage Insurance
For many buyers, there will come a time when their financial situation has changed and they’d like to remove mortgage insurance. On some traditional loans, PMI will automatically cease when they’ve reached a certain loan amount with respect to the home’s value. FHA is not as simple.
In short, the only way to terminate the mortgage insurance premium on an FHA loan is to refinance once you’ve reached a loan amount that wouldn’t require mortgage insurance. Depending on how quickly this is done, buyers may be eligible for a refund of the original upfront premium of 1.75%. Below we’ve included an FHA mortgage insurance refund chart to assist owners in determining the amount of refund they’re eligible for. Please note that a refinance must be completed within 3 years to be eligible:
HUD Mortgage Insurance Premium Refund Chart
Months After Closing
Refund %
Months After Closing
Refund %
Months After Closing
Refund %
1
80%
13
56%
25
32%
2
78%
14
54%
26
30%
3
76%
15
52%
27
28%
4
74%
16
50%
28
26%
5
72%
17
48%
29
24%
6
70%
18
46%
30
22%
7
68%
19
44%
31
20%
8
66%
20
42%
32
18%
9
64%
21
40%
33
16%
10
62%
22
38%
34
14%
11
60%
23
36%
35
12%
12
58%
24
34%
36
10%
Final FHA Items to Know
Naturally, there are other items to consider when pursuing an FHA mortgage. Some sellers may be reluctant to choose a buyer using FHA financing, as it has a reputation for taking longer than traditional loans. There are also certain FHA non-allowable closing costs that prevent the seller from charging the buyer for items that would traditionally be their responsibility. While designed to protect the buyer, this can still deter some private sellers.
As with any major purchase, research your options before committing to any one loan program. It could save you time and money in the long run.
Featured Image: Twenty20
