There are a lot of us that are unfamiliar with what an FHA loan is and why you may have to purchase with an FHA loan. FHA loans are a great mortgage but they can be a little confusing, especially to a first time home buyer. Make sure to read FHA Mortgages on my website, it covers the basics of an FHA loan. I feel that most of the confusion with FHA mortgages is on the upfront mortgage insurance (UFMIP) and the monthly insurance premium (MIP).
My goal is to break down an FHA loan into smaller “chewable” pieces so it is easier to retain and will help you grasp and understand this loan better. So lets start with understanding FHA Mortgage Insurance.
FHA has two kinds of mortgage insurance, an Upfront Mortgage Insurance Premium (UFMIP) and monthly Mortgage Insurance Premium (MIP). The monthly MIP rate can vary for refinances (I will cover this next time). Right now we are only going over the Upfront Mortgage Insurance (UFMIP).
UFMIP is 1.75% and is added to the base loan amount. What does this mean? Well, this means that 1.75% of the base loan amount (purchase price minus your 3.5% down payment) is added onto your base loan amount upfront, hence “upfront MIP”. For example:
$200,000 Purchase Price
– $7000 (3.5% down payment)
= $193,000 BASE Loan amount.
Now you will add the UFMIP:
$193,000 Base loan amount x 1.75% UFMIP = $3377.50
$193,000 + $3377.50
= $196,377.50 New Loan Amount
Make sense? Well, this is the first part for you to chew on. Make sure to check back for the next part of the series, Monthly Mortgage insurance Premium (MIP).
FHA is a great mortgage which has helped many Americans become homeowners. Again, make sure to check back so you catch the next part of the series.
~Until next time,