December 14, 2016
Some borrowers get confused about the FHA’s required mortgage insurance premium (MIP), the Up Front Mortgage Insurance Premium (UFMIP) required to be paid at closing or to be financed into the loan, and private mortgage insurance (PMI).
The FHA loan rulebook says of UFMIP, “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.”
UFMIP is considered a standard cost of an FHA mortgage loan and is a separate expense entirely from the down payment, also known as the minimum required investment. FHA loan rules, as stated above, do permit the financing of the UFMIP, but the amount must either be financed entirely into the loan or paid entirely up front.
The lender will calculate the amount of the mortgage insurance premium (MIP) that’s due each month and include it in the monthly mortgage payment amount. That is different than the UFMIP, and is a recurring expense.
Borrowers sometimes experience confusion over the MIP and private mortgage insurance (PMI) which is not included or required for FHA home loans as described in HUD 4000.1 What is PMI?
The government consumer watchdog agency, the Consumer Financial Protection Bureau (CFPB), defines PMI as follows on its’ official site:
“Private mortgage insurance, also called PMI, is a type of mortgage insurance used with conventional loans. Like other kinds of mortgage insurance, PMI protects the lendernot youif you stop making payments on your loan. PMI is arranged by the lender and provided by private insurance companies.”
“PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the homes purchase price. If youre refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.”
Furthermore, “Lenders may sometimes offer low-down payment conventional loans that do not require PMI. Usually, you will pay a higher interest rate for these loans. Paying a higher interest rate can be more or less expensive than PMI – it depends on your credit score, your down payment amount, the particular lender, and general market conditions.”
CFPB says for those who need to make a lower down payment, FHA loans may offer a distinct advantage in this area depending on borrower qualifications:
“Borrowers making a low down payment may also want to consider other types of loans, such as an FHA loan. Other types of loans may be more or less expensive than a conventional loan with PMI, depending on your credit score, your down payment amount, the particular lender, and general market conditions.”
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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