An FHA loan might be right for you if you have a lower credit score or only a small amount of money saved for a down payment. FHA loans are backed by the Federal Housing Administration and can allow you to buy a home with a credit score as low as 580 and a down payment as low as 3.5%. In some cases, you can even buy a home with a credit score of 500 (but you would need to have a 10% down payment).
With FHA loans, you’ll need to pay a mortgage insurance premium (MIP). This is just an additional payment you make to secure the loan. Let’s take a look at FHA MIP and see how much you can expect to pay over certain loan terms.
Key Takeaway
A key takeaway from this article is that an FHA loan can be a great option for those with lower credit scores or limited funds for a down payment. These loans are backed by the Federal Housing Administration and can allow you to buy a home with a credit score as low as 580 and a down payment of just 3.5%. Additionally, you will need to pay a mortgage insurance premium (MIP).
The amount of MIP that you pay will vary depending on your loan terms. Generally, the longer the term, the lower your MIP rate and vice-versa. Upfront MIP is paid as one lump sum at closing, while annual MIP is typically paid as part of your monthly mortgage payments. The amount of annual MIP that you pay can also be reduced after 11 years for 30-year loans, and 5 years for 15-year loans.
How Does FHA Mortgage Insurance Work?
FHA mortgage insurance is paid in two ways: upfront and annually. The upfront premium is a one-time payment that covers 1.75% of the loan amount. This payment can be rolled into your loan balance or paid out of pocket. The annual premium is an ongoing payment that's generally added to your monthly mortgage payments. This is the cost you'll pay for the FHA’s guarantee of your loan.
How Much Is An FHA Mortgage Insurance Premium?
Generally speaking, FHA mortgage insurance premiums (MIPs) can range from 0.45% to 1.05% of the loan amount on an annual basis. This rate is set by the Federal Housing Administration and can vary depending on the specific loan terms and down payment amount. For example, if you make a down payment of 10%, the MIP rate could be 0.8%.
Terms Less Than Or Equal To 15 Years
For terms less than or equal to 15 years, the annual FHA mortgage insurance premium (MIP) rate is typically lower than for loans with longer terms. This is because a shorter loan term means the loan will be repaid faster, leading to less risk for the lender. The FHA MIP rate for these loans may range from 0.45% to 0.95%, depending on the size of your down payment and other factors.
Terms Greater Than 15 Years
For terms greater than 15 years, the FHA MIP rate is generally higher than for loans with shorter terms. This is because a longer loan term means more risk for the lender since it will take you longer to repay the loan. The FHA MIP rate for these loans may range from 0.7% to 1.05%, depending on the size of your down payment and other factors.
Cancelling Your FHA Mortgage Insurance Premium
The FHA mortgage insurance premium is not something that you’re stuck paying forever. If you’ve been paying your MIP for at least 11 years, you may be able to cancel it. You also may be able to cancel the MIP if you pay off the loan in full or refinance into a conventional loan.
How Long Do You Have To Pay For FHA Loan Insurance?
Generally speaking, FHA mortgage insurance premiums (MIPs) are required to be paid for the entire life of the loan. However, if you have had an FHA loan for at least 11 years and there is no longer a risk that you will default or fall behind on your payments, then you may be able to cancel your MIP. This will depend on a variety of factors, such as the size of your down payment and current market value of your home.
Can You Avoid FHA Mortgage Insurance?
It is possible to avoid paying FHA mortgage insurance, but it will depend on a variety of factors. If you have had an FHA loan for at least 11 years and there is no longer a risk that you will default or fall behind on your payments, then you may be able to cancel your MIP.
This can be done by refinancing your loan into a conventional loan, paying off the loan in full, or certain other methods. Alternatively, you can opt for a no-closing cost FHA loan which will not require any mortgage insurance premium payments.
Save For A Larger Down Payment
Saving for a larger down payment is one of the best ways to reduce the amount of FHA mortgage insurance you need to pay. While you may be able to avoid paying it altogether, increasing your down payment can significantly reduce the amount that you owe. A larger down payment reduces the amount of risk for the lender and lowers your monthly payments, which is why the FHA mortgage insurance premium may be lower for borrowers with larger down payments.
Refinance To A Conventional Loan
Refinancing to a conventional loan can be a great way to reduce or eliminate your FHA mortgage insurance premiums. While FHA loans generally require an upfront mortgage insurance premium (MIP) payment and ongoing MIP payments, conventional loans typically do not have these upfront costs.
Additionally, the FHA MIP rate for loans with terms greater than 15 years may be higher than the MIP rate for a conventional loan with similar terms. Refinancing to a conventional loan can help you save money in the long run and reduce your FHA mortgage insurance payments.
Choose A Different Government or Non-Conforming Loan Type
One option for a government or non-conforming loan type is an FHA 203(k) loan. This type of loan is designed for borrowers who are looking to purchase and fix up a home in need of renovation. It can be used to finance both the purchase of a property and the cost of the repairs, making it an ideal choice for borrowers who are looking to purchase a fixer-upper. Because this type of loan is insured by the Federal Housing Administration, it requires an upfront MIP payment but may have lower ongoing MIP payments than other government or non-conforming loans.
It's important to note that no matter what type of loan you choose, you may still be required to pay FHA mortgage insurance. This is why it's important to consider all of your options and make sure that you choose the loan type that best fits your needs and budget.
Conclusion
Understanding FHA mortgage insurance premiums is important in deciding whether an FHA loan is right for you. Fortunately, the FHA offers more flexibility than other loan types and can help you get into a home with a lower credit score or down payment amount. Knowing what to expect in terms of MIP payments can also help you plan for your future housing expenses.
Take some time to research the FHA loan program and understand what your options are when it comes to MIP payments. It could be the key to unlocking your dream home!