FHA mortgage insurance, typically referred to as MIP, is the one closing cost that is unique to FHA mortgage programs.
**Every FHA mortgage must have mortgage insurance regardless
of the amount of the down payment.**
There are two types of mortgage insurance for FHA insured loans – Up-front Mortgage Insurance Premiums and Monthly Mortgage Insurance Premiums.
Up-front Mortgage Insurance Premium (UFMIP)
UFMIP is calculated at 1.75% of the base loan amount on all loans, regardless of the down payment amount. This insurance protects the lender against losses in the event that the borrower defaults on the loan.
**The entire amount of the UFMIP can be financed into the loan amount!**
- If the FHA loan amount is $100,000 (base loan amount)
- The mortgage insurance premium would be $1,750 ($100,000 x 1.75%)
- The mortgage amount including MIP would be $101,750 ($100,000 + $1,750)
What really happens during an FHA mortgage transaction is that the borrower owes FHA a lump sum mortgage insurance premium. The lender making the FHA loan will actually lend the money for the premium to the borrower and send the money to FHA so that the mortgage will be insured.
Monthly Mortgage Insurance Premium
In addition to the UFMIP, there may be a monthly premium due as well. The monthly premium is .80% of the base loan amount if the loan amount is less than or equal to 95% of the value of the home. If the loan amount is over 95% of the value of the home, the monthly premium is .85% of the base loan amount..
On a 30 year fixed loan, the monthly payment would be calculated as follows:
$100,000 x .80% = $800 / 12 months = $66.67 per month
FHA Minimum Down Payment
Effective January 1, 2009, the minimum down payment required on an FHA loan is 3.5% of the purchase price.
Any deposit (usually called earnest money) that you are required to give to your realtor at the time of an accepted purchase contract will count towards your 3.5% down payment. The appraisal fee collected at the time of inspection will also count towards your 3.5% down payment.
If, for example, you are purchasing a $100,000 house, your minimum down payment required would be $3,500. If your seller/realtor required you to put down $500 in earnest money on top of the $300 for your appraisal, your down payment would be lowered to $2,700 ($3,500 – $500 – $300 = $2,700).
Down Payment As A Gift
If a borrower does not have 3.5% of his or her own money to put down towards the home purchase, FHA allows that amount to be in the form of a gift to the borrower. The gift must be from a qualified source, such as a family member, employer or significant other. The source of the gift must be able to provide proof that they have the money in an account registered in their name prior to transfer to the borrower.
In some areas, this gift may also be grant money from a state or local municipality, if such funds are available.