I recently blogged about three options to eliminate Private Mortgage Insurance (PMI), and I received several notes asking why I did not mention FHA Mortgage Insurance. By the way, I love reader-feedback, so please keep it coming – as it often makes for great blog fodder!
I didn’t cover FHA Mortgage Insurance because I was only blogging about Private Mortgage Insurance (or PMI), and PMI is altogether a different topic from FHA Mortgage Insurance.
Reminders About PMI
As a reminder, PMI is insurance that conventional lenders require borrowers to obtain when their loan-to-value ratio is over 80%. It is called “private” mortgage insurance because it is provided by private insurance companies, in contrast to FHA’s mortgage insurance – which is provided by the government (HUD in particular).
It is important to remember that the insurance only protects the lender and not the borrower. If a borrower defaults or ends up in foreclosure, the PMI provider will make the lender “whole” only and will provide no benefits for the borrower.
PMI payments can be made with monthly premiums, a single upfront premium, or a combination of both.
PMI is also far cheaper now because there is more competition; because the providers use algorithms that reward strong borrowers; and because the providers are just much more efficient in general.
FHA Mortgage Insurance
FHA Mortgage Insurance, or simply MI for brevity’s sake, is a form of mortgage insurance with two parts.
There is an “upfront premium” (typically financed into the loan) that is 1.75% of the total loan amount – and typically rolled into the loan itself (where the loan amount is increased to cover the upfront premium).
There is also an annual premium that ranges from 0.8% to 1.05%. This is paid monthly as a part of your mortgage payment. The MI payment = (the loan amount x the MI rate)/12 months.
Note: The annual premium range hinges on the loan term, size of the loan, and the down payment. Most borrowers, however, pay an annual rate of 0.85% with 3.5% down and a 30-year term.
FHA Is A Much Better Option For Lower Credit Scores
FHA is a great option for borrowers with a limited credit history or lower credit scores – as PMI pricing can be very sensitive to credit score, especially with down payments of less than 10%.
Rate differences can compound the benefits of FHA MI. Depending on borrowers’ FICO brackets, FHA rates are often LOWER than conventional rates.
Hence, we often see cases where slightly higher monthly FHA mortgage insurance is offset by a much lower FHA interest rate – so the borrower’s overall housing payment is much lower with FHA financing.
Another benefit is that FHA financing allows for as little as 3.5% down with loan amounts up to $970,800 in “high cost” areas. FHA down payment flexibility is a HUGE ADVANTAGE for borrowers seeking to minimize cash-to-close.
Appraisal Shortfalls too! FHA is also a great option for borrowers bidding in a hot market who expect an appraisal shortfall, as the low down payment requirement frees up cash to cover shortfalls!
Monthly Payment Comparison
The chart below compares FHA and Fannie Mae (conforming) options for a $900K purchase in a “high-cost” area. Both scenarios assume 5% down and a median credit score of 640 (the key factor that often makes FHA so much better). The rates shown below are actual rates from mid-February of 2022 at a similar cost of points. The rates are shown for illustration purposes only and may not be available or accurate when this blog is published or read.
|Annual Mortgage Insurance Premium|
|Principle & Interest Payment|
|MI Payment (Monthly)|
|Total Monthly Payment:|
Two Final Points
- MI is permanent in most cases, and cannot be eliminated like PMI can.
- We can close FHA Loans in 14 calendar days (not business days) any time, and all day long. It is a myth that FHA loans are harder to close.
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167