An FHA loan gives you the benefit of purchasing a house with a lot less money down than if you took a conventional mortgage. You only have to put 3.5 percent down, but on the downside, you must pay mortgage insurance premiums. This is bad enough, but a certain amount must also be paid up front at closing. The up front mortgage insurance premium (UFMIP) is often added to your loan balance.
Why Loans Carry MIP
Lenders consider loans on properties purchased with less than 20 percent down to be a higher risk to themselves. They will lend to buyers who put less down, but in return they require mortgage insurance. If the loan goes bad, the insurance company pays the loan in full. Whereas conventional loans require borrowers to carry private mortgage insurance (PMI) and make monthly payments, the FHA actually requires payment of mortgage insurance in two forms: The UFMIP and monthly mortgage insurance premiums (MIP).
As of May 2013, the UFMIP for 15 and 30-year loans is 1.75 percent of the loan amount. So if your mortgage is $250,000, your UFMIP is $4,375 due at closing. This is not to be confused with your annual MIP premium which, as of May 2013, is 1.35 percent of your loan amount. So, if your loan is $250,000, your annual MIP is $3,375. This is divided over 12 months of payments, resulting in a monthly MIP payment of $281.25.
The upfront mortgage insurance premium is due at closing. More often than not, the amount is rolled into the loan balance. So if you have a $250,000 loan with a $4,375 UFMIP, your loan amount will be $254,375. The UFMIP is due within 10 calendar days of closing or disbursement, whichever is later. If received after 10 calendar days, there will be a one-time four percent late charge. If the UFMIP is received more than 30 calendar days after closing or disbursement, there is a one-time interest charge based on U.S. Treasury’s Current Value of Funds Rate in effect the day the UFMIP is remitted.
Typically, you can’t cancel MIP until you've paid down your loan so that it's only 78 percent of the value of your home. If it's a 30-year loan, you must also have paid on the loan for a minimum of five years. However, as of June 3, 2013, most new FHA loans will require you to pay annual MIP for the life of the loan. Regardless, the UFMIP never gets removed from your loan amount, making an FHA loan potentially very expensive.