If you are a first time home buyer, you’ve most likely have heard about FHA loans, and you probably have plenty of important questions.
As you are deciding whether an FHA loan is best for you, it is important that you understand it’s unique features and how it works.
One of the most important details of an FHA loan to consider are the required fees involved. Before we go over the fees, let’s look at the reason for these fees by covering the “who’s” and “hows” of an FHA loan.
How does an FHA loan work?
The loan is insured against default by the Federal Housing Administration (FHA). Essentially, the FHA guarantees that a bank won’t have to eat the loss on a loan of the borrower defaults. If a borrower defaulted on the loan, FHA will pay that loan back.
In order to maintain the capability to pay back these defaulted loans, FHA charges two types of fees; the upfront mortgage insurance premium (UFMIP), and the annual mortgage insurance (MI).
Upfront Mortgage Insurance Premium (MIP)
In the past, we have written countless articles here on BMC about the FHA fees changes. In the last year alone, the fees have changed three different times! Currently, the UFMIP is at 1% of the loan amount. This amount is paid upfront when the loan is financed, and you do have the option to finance this fee into your primary loan.
Annual Mortgage Insurance (MI)
In addition to the UFMIP, you will also be responsible to pay an annual mortgage insurance that is broken down into monthly payments.
The MI works similarly to the annual insurance premium you pay on your car. When you get car insurance, you have an annual premium that most people choose to pay in monthly installments. In the same fashion, FHA currently charges an annual premium of 1.15% of the loan amount that is broken down into monthly payments.
These monthly payments are automatically included in your total monthly mortgage payment.
You’ve found a home for a purchase price of $300,000 and you have provided a 3.5% down payment of $10,500 using an FHA loan. Here is how we can figure out how much the two fees will cost:
$300,000 – $10,500 = $289,500 Loan Amount
$289,500 x 1% = $2,895 UFMIP
$289,500 x 1.15% = $3,329.25 Annual MI, or $277.43 a month
While they do have additional costs, FHA loans have provided many buyers the opportunity of homeownership that may not have otherwise been possible using conventional financing. FHA is ideal for first time buyers who have minimal savings for a down payment and less than perfect credit, but looking for competitive rates.
Each buyer’s situation is different, and it’s important to know exactly what all your options are. If you are interested in seeing if an FHA loan would work for you, feel free to email/call/text me anytime at (562) 972-0351, or leave a comment below.