Lenders often require buyers to put down a 20% down payment to purchase a house. If you don’t have that money today, you can still purchase your house through an FHA mortgage or other low down payment programs. But this option comes with the cost of mortgage insurance. Calculate your FHA upfront mortgage insurance premium and annual rates to determine how much you can afford to take out from the bank.
What Are FHA Mortgages?
FHA mortgages are loans that are backed by the Federal Housing Administration (FHA.) They are one of the most popular options for first-time home buyers due to their flexibility. If first-time home buyers struggle with qualifying for a mortgage, they still have a chance by applying for an FHA loan.
The FHA only requires borrowers to put 3.5% down in order to qualify for most loans.
However, borrowers should know that paying less upfront will come with costs in the form of mortgage insurance premiums.
Why Do I Need to Pay a Mortgage Insurance Premium?
The FHA can take on more risk due to its government backing, but high-risk loans come with a cost. Borrowers who can only put up 3.5% of a down payment are subject to mortgage insurance premiums.
Mortgage insurance premiums (MIPs) are extra fees that protect the lender from potential losses. Lenders can’t guarantee that a borrower with only 3.5% to put down will be able to pay back the loan - especially when compared to a borrower who can put down the traditional requirement of 20%. Lenders add mortgage insurance premium payments to monthly payments when the borrower can’t put 20% down.
How to Calculate Your FHA Upfront Mortgage Insurance Premium
There are two types of FHA mortgage insurance premiums: upfront and annual. Lenders tack annual amounts onto your monthly loan payments and collect upfront payments upon distribution of the loan. These rates are calculated differently.
The upfront mortgage insurance premiums are easy to calculate. Lenders simply charge 1.75% of your loan amount. If you were taking out $200,000 to buy a house, for example, you would pay a $3,500 upfront mortgage insurance premium.
If you sell your house within a few years, you may be able to get a portion of your upfront mortgage insurance premium back.
Annual rates are slightly different. Calculations depend on the amount of your loan, the loan terms, and the loan to value (LTV) ratio. LTV ratios are calculated based on how much you are paying upfront; if you are taking out a loan and making a 10% down payment, you will be taking out a loan with a 90% LTV ratio.
If you are taking out a 20-year or 30-year mortgage, use this table to calculate your annual rates:
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If you are taking out a 15-year mortgage or a mortgage with shorter terms, use this table to calculate your annual rates:
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($200,000 (original loan amount) - $20,000 (10% down payment)) x (.008) = $1,440 annually. This amount is tacked onto your overall loan amount and paid monthly. If you were taking out a 30-year mortgage for a house $200,000 and putting down a 10% down payment, your calculations would look like this:
Ask a Buyer’s Agent About FHA Loans
FHA mortgages offer flexibility for borrowers who are ready to buy a home but may not be ready to meet all traditional loan terms. They come with a cost, but with proper budgeting, you will be prepared to take on higher monthly payments and get the house of your dreams with an FHA loan.
As you start to think about applying for loans, talk to a buyer’s agent. A buyer’s agent can help you through every step of the home buying process, from vetting houses to calculating your FHA upfront mortgage insurance premium as you weigh your loan options.
Start connecting to high-quality buyer’s agents in your area by filling out our online form.