The multitude of mortgage options with varying down payment percentages available to homebuyers now makes it more than easier to buy a home. But the challenge with homebuying is that when you try to save on one thing, you end up gaining more costs on another. If you opt for a property with a lower price range, there’s a high probability that you’ll have extra costs on repairs and renovation. Much goes the same if you make a 3% down payment, you’re likely to be charged with mortgage insurance. If you do so on a conventional loan, it becomes eligible for a Private Mortgage Insurance (PMI) while FHA-insured loans, on the other hand, would have additional monthly expenses in the form of Mortgage Insurance Premiums (MIP). All FHA loans have it but there’s no fixed rate as everything will depend on the loan amount, size of the down payment, borrower’s loan-to-value ratio, and mortgage terms. This guide will help you give a clear picture of how you can work around MIP to help you get through it more wisely.

Homebuying can entail a whole lot of challenges to anyone even if you have a good credit history. Mortgage approvals alone can be a long process if you’re unaware of what lenders may require from you. Our real estate training program helps aspiring homebuyers learn how to leverage owner financing as an alternative to get the home of their choice anywhere in Houston. This third-party owner financing affords homebuyers a 30-year amortization with reasonable interests minus balloon payments. They also get to refinance through a conventional lender without worrying about pre-payment penalties. Explore the Houston housing market by filling out the MLS form below and let us know if you find a home in your budget and desired location. We will get you on your home buying journey in no time. 

What is a Mortgage Insurance Premium?

Mortgage Insurance Premium or PMI is the FHA loan’s version of the Private Mortgage Insurance (PMI) Not to be confused with Mortgage Protection Insurance (MPI), MIP serves to offset the risk of FHA-qualified lenders in case a borrower falls behind on monthly payments. Anyone who’s buying a home with FHA-insured loans are required to pay an additional 1.75% of the overall loan amount upfront to cover for the MIP. The amount, as mentioned, will vary depending on factors such as borrower’s loan-to-value ratio, overall size of the loan amount, down payment percentage, and loan terms.

Say you’re buying a house worth $300,000 on an FHA Loan with a 30-year amortization with a down payment of 3.5%; you’ll have additional upfront costs amounting to $5,250. That figure does not include the annual MIP costs (added to monthly mortgage payments) that could go anywhere between 0.45-1.05% of the total loan amount. It’s not just for mortgages, though, as refinancing your FHA loan will also require you to pay upfront and annual premiums.

How Does MIP Work?

Up until the end of 2012, MIPs worked like conventional loan PMIs wherein monthly payments get cancelled once the borrower reached 22% of the home’s equity. Since then, monthly payments for MIP no longer get canceled. Instead, payment terms would depend entirely on the mortgage’s down payment amount. If a 10% down payment has been made, the borrower would pay additional MIP costs on their monthly payments for a maximum of 11 years. Any down payment made below 10% would have borrowers paying for MIP throughout the duration of the loan.

There is no way to avoid MIP, at least not completely. There are several ways to lower monthly costs though, first of which is making the aforementioned 10% down payment. It will reduce your overall loanable amount but you’ll get lower upfront premiums and annual payments as well. Another way to lower your monthly costs is to meet your lender’s minimum requirements for a conventional loan and refinance. The smartest time to switch is when you’ve already reached 20% of your home’s equity so you can avoid having to trade MIP for a PMI. Different lenders will have different requirements but the most common ones include a minimum FICO credit score of 620 along with a debt-to-income ratio of not more than 50%.

The Bottomline

FHA loans have a lot of perks to offer, especially to credit-challenged homebuyers. But going for the minimum down payment may actually cost you in the long run. If you’re financial capability, credit score, and debt-to-income ratio only allow you to qualify for FHA-insured loans, be sure to put at least 10% on the closing table to ensure lower upfront premiums and lower annual costs for MIP.

Choosing mortgages are but a first step in the homebuying, albeit, an important one. In the meantime, you can narrow down your homebuying considerations by searching for the perfect home through these available listings.

Disclaimer: Shop Owner Finance/ TL Global is not a lender. We are a real estate training agency. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.