August 19, 2017

How To Get An FHA Loan Without Mortgage Insurance

The FHA loan program currently offers lower down payments, easier borrower qualification and lower rates than conforming loans.  The offset to these benefits is the imposition of an upfront mortgage insurance premium (UFMIP) and continuing monthly mortgage insurance (MI) premiums.

The combined UFMIP and monthly MI payments represent a major cost to an FHA borrower.  For example, on a $250,000 loan with only a 3.5% down payment, the FHA charges an UFMIP of 1% or $2,500.  In addition, the monthly mortgage insurance premium due every month with the loan payment would amount to 1.15% or $239.58 per month.   Over a five year period, the combined upfront and monthly mortgage insurance payments would total a not inconsiderable $16,875.  Over a ten year period the total FHA mortgage insurance cost would be $31,250.

The FHA monthly mortgage insurance premium payment could continue for many years depending on the future value of the borrower’s home.  The FHA cancels the annual mortgage insurance premium when the loan to value (mortgage balance divided by current value of home) reaches 78% and there are 15 years or less remaining on the mortgage.

Typically, on a 30 year loan, a borrower’s monthly payments will reduce the mortgage balance by 22% in about 10 years.  The monthly mortgage insurance payment would end after another five years when the remaining loan term is reduced to 15 years.  However, if the price of the home declines, the loan to value (LTV) may not decline to 78% and the borrower would continue to be charged monthly mortgage insurance.

Is there a way to entirely avoid paying the monthly mortgage insurance premium on an FHA loan?  The answer is yes, according to the FHA.

In a “mortgagee letter” dated September 2011, the FHA confirmed that the annual mortgage insurance premium will not be charged on all future FHA mortgages that have a loan term of 15 years or less with a loan to value (LTV) at or below 78% at the time of loan origination.  The upfront MIP on such loans would still be imposed at a rate of 1% of the loan amount.

The chart below summarizes the upfront mortgage insurance premium as well as the annual mortgage insurance premium, depending on the loan to value and term of the mortgage at the time of origination.

The decision on whether is makes sense to buy a home with only a minimal down payment and high mortgage insurance premiums is complicated  and should be discussed with a financial adviser or accountant.  If home prices go up from here, the right choice is to buy sooner with a smaller down payment.  If home prices continue to decline or remain stagnant for an extended number of years, the wiser financial choice may be to postpone the purchase of a home.