Mortgage Insurance FHA: Everything You Need to Know

Are you thinking of buying a new house? If so, you might be looking into getting an FHA (Federal Housing Administration) loan. But did you know that there is a mortgage insurance requirement that comes with an FHA loan?

In this article, we’ll break down everything you need to know about mortgage insurance FHA, including what it is, how much it costs, and how to get rid of it. Let’s get started!

What is Mortgage Insurance FHA?

Mortgage insurance FHA is a type of insurance that protects lenders in case borrowers default on their loans. It’s required for all FHA-backed loans, which are loans that are insured by the Federal Housing Administration.

The purpose of mortgage insurance FHA is to reduce the risk for lenders when lending money to borrowers with low credit scores or who are unable to make a large down payment on the house they want to buy. With mortgage insurance FHA, the lender is able to recover some of the money they lent to the borrower if they default on the loan.

How Does Mortgage Insurance FHA Work?

When a borrower applies for an FHA-backed loan, they have to pay an upfront mortgage insurance premium (UFMIP) and monthly mortgage insurance premiums (MIP). The UFMIP is a one-time payment that is usually rolled into the loan amount, while MIP is a recurring payment that is added to the borrower’s monthly mortgage payment.

The amount of MIP the borrower has to pay depends on the size of their down payment, the term of the loan, and the loan-to-value (LTV) ratio. The LTV is a ratio that compares the loan amount to the appraised value of the property. If the LTV is high, meaning the borrower has a low down payment, the MIP will be higher.

How Much Does Mortgage Insurance FHA Cost?

The cost of mortgage insurance FHA varies depending on the size of the down payment and the length of the loan. In general, the MIP ranges from 0.45% to 1.05% of the loan amount annually.

As mentioned earlier, borrowers also have to pay an upfront mortgage insurance premium (UFMIP). The UFMIP is 1.75% of the loan amount and is usually rolled into the loan.

Here’s an example of how much mortgage insurance FHA would cost for a $200,000 loan with a 3.5% down payment:

Term of Loan
LTV Ratio
Annual MIP
Monthly Payment
30 years
96.5%
0.85%
$142

How to Get Rid of Mortgage Insurance FHA

If you have an FHA-backed loan, you might be wondering how to get rid of mortgage insurance FHA. Here are some options:

Refinance

If you have enough equity in your home, you might be able to refinance your FHA-backed loan into a conventional loan. Conventional loans don’t require mortgage insurance if you have at least 20% equity in your home.

Pay Down Your Loan

If you don’t want to refinance, you can also pay down your loan to get rid of mortgage insurance FHA. Once you reach an LTV ratio of 78%, the MIP will automatically be removed from your monthly payment.

Wait it Out

If you can’t afford to refinance or pay down your loan, you can always wait for the MIP to expire. For loans with a 30-year term and a down payment of less than 10%, the MIP will be removed after 11 years. For loans with a down payment of 10% or more, the MIP will be removed after 11 years.

FAQ

What is the difference between mortgage insurance and homeowners insurance?

Mortgage insurance and homeowners insurance are two different types of insurance. Mortgage insurance FHA is required for FHA-backed loans and protects the lender in case the borrower defaults on their loan. Homeowners insurance, on the other hand, is a type of insurance that protects the homeowner in case of damage to their property.

Do I need mortgage insurance FHA?

If you’re getting an FHA-backed loan, you’ll need to have mortgage insurance FHA. The only way to avoid it is by putting down at least 10% on your home purchase.

What happens if I default on my FHA-backed loan?

If you default on your FHA-backed loan, the lender can foreclose on your property to recover the money they lent you. If the foreclosure sale doesn’t cover the entire amount of the loan, the lender can file a claim with the FHA to get reimbursed for their losses.

How long do I have to pay mortgage insurance FHA?

If you have a 30-year term with less than 10% down payment, you’ll have to pay mortgage insurance FHA for the entire term of the loan. If you have a 30-year term with a down payment of 10% or more, you’ll have to pay mortgage insurance FHA for at least 11 years.

Can I cancel my mortgage insurance FHA?

You can’t cancel mortgage insurance FHA, but you can get rid of it by refinancing or paying down your loan.

Conclusion

Now that you know everything you need to know about mortgage insurance FHA, you can make an informed decision when buying a new home. Remember that mortgage insurance FHA is required for FHA-backed loans, but there are ways to get rid of it. Whether you choose to refinance, pay down your loan, or wait it out, make sure you’re making the best decision for your financial situation.