There are a lot of costs associated with getting a government-backed home loan.
The down payment and closing costs can add up to tens of thousands of dollars.
But there’s one cost you need to prepare for, the upfront mortgage insurance premium (UFMIP).
This article will look at what upfront mortgage insurance is, the rate for each type of mortgage, and which mortgage loans don’t require it.
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What is Upfront Mortgage Insurance (UFMIP)
An up-front mortgage insurance (UFMI) premium is required on government home loans. The government can guarantee mortgage loans because borrowers pay an annual mortgage insurance premiums (MIP) along with an upfront MIP payment.
Upfront MIP by loan type
The Federal Housing Administration guarantees FHA home loans allowing lenders to lower their credit and down payment requirements. The FHA upfront mortgage insurance premium is 1.75% of the loan amount. Annual FHA mortgage insurance premiums are between 0.45% to 1.05%, they are typically 0.85% for loans less than $625,000 with a 3.5% down payment.
- Upfront MIP – 1.75%
- Annual MIP – 0.50% – 1.05% (0.85% on most FHA loans)
The U.S. Department of Agriculture guarantees USDA home loans for borrowers buying a home in rural areas of the country. They offer 100% financing and have a lower mortgage insurance premium than FHA at just 0.35%. The upfront premium for USDA loans is 1.00%.
- Upfront MIP – 1.00%
- Annual MIP – 0.35%
FHA 203k loans are a home improvement loan that finances a house plus the cost of repairs or renovations. Because 203k loans ar guaranteed by the Federal Housing Administration they have the same mortgage insurance requirement of 1.75% of the loan amount.
- Upfront MIP – 1.75%
- Annual MIP – 0.85%
The Department of Veterans Affairs guarantees mortgage loans for veterans of the U.S. military. VA home loans don’t require an annual mortgage insurance premium and the upfront fee is called a VA funding fee and is 2.15% of the loan amount.
- Upfront VA funding fee – 2.15%
- No mortgage insurance required
Regular Military VA Funding Fee
Why is an Upfront Mortgage Insurance Premium Required?
The government guarantees home loans allowing mortgage lenders to lower their credit score and down payment requirements. Borrowers with a lower fico score who put little to money down are more likely to walk away from a mortgage because they have less invested in the home and don’t stand to lose much. Because of this, they require an upfront premium to help fund the program.
The mortgage insurance premium is put into an escrow account set up by your lender. The premium is sent directly to the U.S. Department of Housing and Urban Development (HUD).
MIP vs. PMI
MIP is similar to private mortgage insurance (PMI), required on conventional loans with a loan-to-value ratio above 80%. Once the LTV ratio reaches 78%, PMI is no longer required. However, conventional loans do not require an upfront PMI premium.
With a conventional mortgage, the PMI cancels after the loan-to-value ratio reaches 78%. This is not the case with FHA and USDA loans, which require mortgage insurance for the life of the loan. If your down payment was 10% or higher, MIP will cancel on an FHA loan after 11 years.
The annual mortgage insurance premium (MIP) is included in your monthly payment and goes into the escrow account your lender sets up for.
â¢ Down payment of 10% or more MIP duration is 11 years
â¢ Down payment of less than 10% MIP is required for the life of the loan
Upfront Mortgage Insurance Refunds
You may be eligible for a refund of the upfront mortgage insurance premium if you refinance your home loan within three years.
If you get an FHA loan and refinance your loan with an FHA streamline refinance or FHA cash-out refinance within three years, you will be eligible to have a portion of the upfront MIP refunded to you. The largest refund is 80% of the premium after the first month of closing on your mortgage and decreases by 2% for each month after.
MIP Refund Chart
Upfront MIP Refund Requirements
- Been less than three years since closing
- Must be current on your mortgage
- No late mortgage payments
- Must refinance into another FHA loan