What is an FHA Mortgage

FHA is an insured loan, insuring the lender that incase of a default, FHA will pick up the tab. It typically requires two MI amounts, monthly and up front. You can get an ARM FHA loan, or a FRM FHA loan. You can even get a HECM FHA loan. 

Current Up-Front FHA Mortgage Insurance (MI) Premium

The up front MI is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio. 

ANNUAL or Monthly FHA MI  

UPDATED: 02/25/2018

FHA MIP Chart for Loans Greater Than 15 Years
Base Loan Amount	LTV	Annual MIP
≤$625,500	>95.00%	0.85%
>$625,500	≤95.00%	1.00%
>$625,500	>95.00%	1.05%

FHA down payment

A borrower's down payment may come from a number of sources. The 3.5% requirement can be satisfied with the borrower using their own cash or receiving a gift from a family member, their employer, labor union, or government entity. Since 1998, non-profits have been providing down payment gifts to borrowers who purchase homes where the seller has agreed to reimburse the non-profit and pay an additional processing fee. In May 2006, the IRS determined that this is not "charitable activity" and has moved to revoke the non-profit status of groups providing down payment assistance in this manner. The FHA has since stopped down payment assistance program through third-party nonprofits. There is a bill currently in Congress that hopes to bring back down payment assistance programs through nonprofits.

Mortgage insurance

Mortgage insurance protects lenders from mortgage default. If a property purchaser borrows more than 80% of the property's value, the lender will likely require that the borrower purchase private mortgage insurance to cover the lender's risk. If the lender is FHA approved and the mortgage is within FHA limits, the FHA provides mortgage insurance that may be more affordable, especially for higher-risk borrowers

Lenders can typically obtain FHA mortgage insurance for 96.5% of the appraised value of the home or building. FHA loans are insured through a combination of an upfront mortgage insurance premium (UFMIP) and annual mutual mortgage insurance (MMI) premiums. The UFMIP is a lump sum ranging from 1 – 2.25% of loan value (depending on LTV and duration), paid by the borrower either in cash at closing or financed via the loan. MMI, although annual, is included in monthly mortgage payments and ranges from 0 – 1.35% of loan value (again, depending on LTV and duration).

If a borrower has poor to moderate credit history, MMI probably is much less expensive with an FHA insured loan than with a conventional loan regardless of LTV – sometimes as little as one-ninth as much depending on the borrower's credit score, LTV, loan size, and approval status. Conventional mortgage insurance rates increase as credit scores decrease, whereas FHA mortgage insurance rates do not vary with credit score. Conventional mortgage premiums spike dramatically if the borrower's credit score is lower than 620. Due to a sharply increased risk, most mortgage insurers will not write policies if the borrower's credit score is less than 575. When insurers do write policies for borrowers with lower credit scores, annual premiums may be as high as 5% of the loan amount.

Canceling FHA mortgage insurance

The FHA insurance payments include two parts: the upfront mortgage insurance premium (UFMIP) and the annual premium remitted on a monthly basis—the mutual mortgage insurance (MMI). The UFMIP is an obligatory payment, which can either be made in cash at closing or financed into the loan, so that you really pay it over the life of the loan. It adds a certain amount to your monthly payments, but this is not PMI, nor is it the MMI. When a homeowner purchases a home utilizing an FHA loan, they will pay monthly mortgage insurance for a period of five years or until the loan is paid down to 78% of the appraised value – whichever comes later. The MMI premiums come on top of that for all FHA Purchase Money Mortgages, Full-Qualifying Refinances, and Streamline Refinances.

When we talk about canceling the FHA insurance, we talk only about the MMI part of it. Unlike other forms of conventional financed mortgage insurance, the UFMIP on an FHA loan is prorated over a three-year period, meaning should the homeowner refinance or sell during the first three years of the loan, they are entitled to a partial refund of the UFMIP paid at loan inception. If you have financed the UFMIP into the loan, you cannot cancel this part. The insurance premiums on a 30-year FHA loan which began before 6/3/2013 must have been paid for at least 5 years. The MMI premium gets terminated automatically once the unpaid principal balance, excluding the upfront premium, reaches 78% of the lower of the initial sales price or appraised value. After 6/3/2013 for both 30 and 15 year loan term, the monthly insurance premium must be paid for 11 years if the initial loan to value was 90% or less. For loan to value greater than 90% the insurance premium must now be paid for the entire loan term.

A 15-year FHA mortgage annual insurance premium will be cancelled at 78% loan-to-value ratio regardless of how long the premiums have been paid. The FHA’s 78% is based on the initial amortization schedule, and does not take any extra payments or new appraisals into account. For loans begun after 6/3/2013, the 15-year FHA insurance premium follows the same rules as 30-year term (see above.) This is the big difference between PMI and FHA insurance: the termination of FHA premiums can hardly be accelerated.


Borrowers who do make additional payments towards an FHA mortgage principal, may take the initiative through their lender to have the insurance terminated using the 78% rule, but not sooner than after 5 years of regular payments for 30-year loans. PMI termination, however, can be accelerated through extra payments or a new appraisal if the house has appreciated in value.