Acronym: UFMIP
How UFMIPs Work
If you were to take out a conventional mortgage, you may pay as much as 20% or more as your down payment. This type of expense may be out of reach for some homebuyers, so FHA loans exist to help borrowers who otherwise can’t afford a mortgage. If you wanted to get an FHA loan, you’d apply through a lender, and the FHA would guarantee the loan. At closing, you’d pay a UFMIP of 1.75% of your mortgage on top of the down payment to the lender. The UFMIP funds are then paid to HUD by your lender. They help protect the lender and the FHA in case you default on your mortgage. For example, say you want to buy a home that costs $300,000. You are approved for an FHA loan and are expected to make a down payment of at least 3.5% of the purchase price, which is $10,500. When you close on the home, you’ll also need to pay a UFMIP of 1.75% of the base loan amount, which is the part of your home you’ll finance through the mortgage. If the home is $300,000, and you’ll put down $10,500, you’ll pay 1.75% on $289,500, which is $5,066.25. This means you need at least $15,566.25 in cash ready at closing (plus any money you’ll need for other fees).
Pros and Cons of UFMIPs
Pros Explained
Makes it easier to qualify for a mortgage: Because of safeguards like UFMIP, the government is able to back FHA loans. This gives more options to borrowers who would normally have a hard time qualifying for a conventional mortgage.Lower down-payment requirements: The UFMIP is 1.75% of the base loan amount. While it is an additional cost, the down payment is lower than a conventional mortgage, which may still make this more affordable than your other home loan options.
Cons Explained
Additional upfront cost required: When you close on your home, you’ll be required to make a one-time payment of 1.75% of the mortgage. This fee is in addition to other closing costs and expenses that come with buying a home. UFMIP drives up the total cost of purchasing a home, which can be hard for borrowers if they have limited financial resources. Still required to pay an annual mortgage insurance premium: The UFMIP isn’t the only mortgage insurance fee you’ll need to pay; there’s still an annual one (more on that below).
Upfront Mortgage Insurance Premium vs. Annual Mortgage Insurance Premium
In addition to paying UFMIP, FHA borrowers are required to pay an annual mortgage insurance premium (AMIP). The main difference between the two types of insurance premiums is that the UFMIP is a one-time payment due at closing, whereas the AMIP is an ongoing monthly expense. The AMIP is calculated annually and paid on a monthly basis. The exact cost of the AMIP varies depending on the loan amount, whether you took out a 15-year or 30-year mortgage, and your current loan-to-value (LTV) ratio. The total cost of the AMIP ranges between 0.45% and 1.05%.
