Do You Need Mortgage Insurance with an FHA 203(k) Loan?
Do you need mortgage insurance with an FHA loan? The simple answer here is yes. Why, though? It might seem strange that you are required to pay for insurance when the FHA is already insuring the mortgage for the lender. Why the additional charges?
To understand that, you need to know how the FHA works. Most government agencies are funded by taxpayer dollars. For instance, your tax dollars go to pay IRS employees. They go to pay VA staff members. What they do not do, however, is fund the FHA. In fact, the FHA is the only self-funded organization within the federal government, and that is possible because you pay mortgage insurance.
In a nutshell, your mortgage insurance premiums go directly to the FHA, not to the lender. This money is then used to help the organization make good on its guarantee for lenders. Suppose you were to default on your mortgage. That would ordinarily leave the lender holding the bag. However, because you have an FHA mortgage, the government steps in and resolves the matter. Cash is needed for that, and it comes from your insurance payments.
MIP vs. PMI
If you have done any research into home loans, you have at least heard of PMI, or private mortgage insurance. This is mandatory for anyone taking out a conventional home loan who cannot put down 20% of the home’s sale price. It essentially protects the lender in the event that the buyer defaults on the loan. Once a conventional loan reaches 80% LTV, that PMI can be cancelled, and the homeowner’s mortgage payments will drop.
In comparison, those going through the FHA to get a home loan will be required to deal with MIP, or mortgage insurance premiums. However, there are actually two things you will need to be aware of here.
The first is UMIP, sometimes just called MIP, which is a one-time, upfront mortgage insurance premium. It is due at the time of closing, and will be 1.75% of the total loan amount. So, if your loan was for $300,000, then you would pay a one-time fee of $5,250. This amount can be either paid directly, or it can be rolled into your closing costs. While it’s tempting to roll the fee so you can put off having to shell out yet more of your hard-earned money, realize that doing so will increase your mortgage payments and the total cost of the home.
The second thing to be aware of is called AMIP, or annual mortgage insurance premium. Essentially, there is an annual insurance cost for your loan. It is broken down into monthly installments, and is worked into your loan payment. There are numerous factors that go into what you’ll end up paying in terms of AMIP, but the information below should help clarify things for you:
A 30-year loan with an LTV of 95.01% or higher will result in .85% AMIP.
The same loan with an LTV of 95.00% or lower will result in .80% AMIP.
A 15-year loan with an LTV of 90.01% or higher will result in .70% AMIP.
The same loan with an LTV of 90 to 78.01% will result in .45% AMIP.
Implications of MIP for FHA Borrowers
There are many implications of MIP for borrowers interested in taking out an FHA loan. The most important is that it will increase your costs for the duration of your loan in most instances. Remember that while a conventional loan can have PMI dropped at 80% LTV, that does not apply to FHA loans. However, this situation varies depending on the amount of your down payment (another excellent reason to put down as much as you can).
Borrowers with fixed-rate home loans issued after June 3, 2013 with 10% or more down can cancel mortgage insurance after 11 years. Note that if you did not put at least 10% down on your mortgage, you will most likely be required to carry mortgage insurance for the duration of your FHA loan.