Reader question: “I have heard that FHA home loans are popular with home buyers because they don’t require PMI insurance. But then I read something that said the insurance costs can be even higher on government-insured mortgages than with conventional, and that I would have to pay the policy for the life of the loan. So now I’m confused. My question is, does an FHA loan require PMI or not? And will I have to pay the premium for the full life of the loan?”
It’s the terminology that’s confusing you. So let’s start there. PMI stands for private mortgage insurance. This protection is typically required whenever a home loan accounts for more than 80% of the purchase price (which occurs when the borrower makes a down payment below 20% in a single-mortgage scenario).
But the key word here is “private.” PMI applies to conventional loans that do not have any kind of government insurance or backing. FHA home loans, as you probably already know, are insured by the federal government through the Federal Housing Administration. So, technically speaking, PMI is not required for an FHA loan. But you’ll still have to pay a government-provided insurance premium, and it might be required for the full term, or life, of the mortgage obligation.
FHA Loans Require Mortgage Insurance, But Not PMI
All home loans insured by the Federal Housing Administration require insurance to protect the lender — it’s just not the “private” kind. So the policies applied to FHA loans are simply referred to as mortgage insurance premiums, or MIPs. But the ‘P’ here stands for premium, not private. These policies are issued by the government, not by private-sector companies.
Still with me? Good, because this is a common source of confusion among home buyers and borrowers.
To answer your second question: Yes, you could end up paying your annual premium for the life of the loan, depending on the size of your down payment. This is one of the primary drawbacks of using the FHA program, as it inflates your monthly payments.
There are actually two types of insurance premiums required for these loans. It is the Department of Housing and Urban Development (HUD) that manages this program. So I will defer to them for an official statement. According to the HUD website:
“In most FHA programs, an Up-Front Mortgage Insurance Premium (UFMIP) is collected at loan closing; and an Annual Mortgage Insurance Premium (MIP) is collected in monthly installments.”
The annual premium is the one you could end up paying for the full term or “life” of the loan, even if you keep it for 30 years. This is due to a new rule introduced in 2013, with the issuance of HUD Mortgagee Letter 2013-04. This rule took effect last year and will therefore apply to all FHA home loans generated in 2014, unless it is rescinded or replaced by additional guidance.
Annual MIP Required for the Life of the Loan, in Some Cases
The upfront premium (UFMIP) can be paid as a lump sum at closing, or rolled into the loan. Either way, it’s a one-time payment. The annual MIP, on the other hand, is a recurring expense that has to be paid for the life of the loan in some cases.
Once upon a time, the annual mortgage insurance premium could be canceled when the borrower reached a loan-to-value (LTV) ratio of 78%. But that rule was changed in 2013, as mentioned above. Going forward, in 2014 and beyond, most FHA borrowers who put down less than 10% will have to pay the annual MIP for the life of the loan. It bears repeating: A down payment below 10% is what triggers this “lifetime” premium requirement (see table).
The table below was included with Mortgagee Letter 2013-04, which announced the new policy regarding MIP cancellation. The “Previous” column shows the old rules for cancellation. The “New” column shows the revised rules, which took effect in June 2013.
As you can see, whenever the LTV is greater than 90% (meaning the borrower makes a down payment below 10%), FHA annual mortgage insurance is required for the life of the loan. This is true for all purchase loans regardless of the length of the term, as indicated in the first column of the table.
Where to Learn More
As mentioned earlier, it is the Department of Housing and Urban Development that manages and oversees the FHA loan program. So if you want to learn more about the rules for insurance premiums, you should refer to the HUD.gov website. Specifically, you’ll want to peruse HUD Handbook 4155.2, Chapter 7, which explains the premium structure and requirements in detail. You can also refer to the Mortgagee Letter mentioned throughout this article. Lastly, for a quick overview of the program, be sure to download our free handbook.
Disclaimers: This article answers two common questions: (1) Do FHA loans require PMI coverage, and (2) is mortgage insurance required for the entire life of the loan. The information above has been adapted from official guidelines issued by both the Federal Housing Administration and the Department of Housing and Urban Development. Portions of this article may become outdated and/or inaccurate as HUD makes additional changes to the program. To learn more about this program, we recommend that you speak to a HUD-approved housing counselor. You can also call their toll-free Q&A line at (800) CALL-FHA (225-5342).