*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
An FHA loan might be right for you if you have a lower credit score or a small amount of money saved for a down payment. An FHA loan can allow you to buy a home with a credit score as low as 580 points and a down payment as low as 3.5%. In some cases, you can even buy a home with a credit score of 500 (but you would need to have a 10% down payment). With Rocket Mortgage®, the minimum credit score for an FHA loan is 580. With FHA loans, you’ll need to pay a mortgage insurance premium.
We’ll take a look at the FHA MIP. We’ll show you how much you can expect to pay for your MIP and how long it lasts.
How Much Is FHA Mortgage Insurance Premium?
Your FHA loan MIP will involve two payments: an upfront premium and an additional annual payment. The amount you’ll pay for both depends on the size of your loan.
Your MIP upfront payment will be equal to 1.75% of the total value of your loan. For example, if you borrow $150,000 to buy a home, you’ll pay $3,500 for your upfront payment. Your upfront MIP is due at closing. Alternatively, it can be added onto the balance of the loan. Your upfront payment is only due once unless you refinance or take on another FHA loan in the future.
Your annual mortgage insurance costs will vary depending on how much money you borrow, your down payment size and the length of your mortgage term. Lenders calculate your annual payment as a percentage of your base loan value. Most FHA lenders add your annual MIP to your monthly mortgage payment. To find out how much you’ll pay each month, simply divide your annual payment by 12.
Let’s take a closer look at what you can expect to pay depending on your term.
Terms Less Than Or Equal To 15 Years
Here’s what you can expect to pay for your annual MIP if your loan term is less than or equal to 15 years. Let’s say you:
- Borrow less than or equal to $625,500, with a down payment of at least 10%. You’ll pay 0.45% annually. On a $150,000 home loan, that’s $675 every year, or $56.25 each month.
- Borrow less than or equal to $625,500, with a down payment of less than 10%. You’ll pay 0.70% annually. On a $150,000 home loan, that’s $1,050 every year, or $87.50 each month.
- Borrow more than $625,500, with a down payment greater than or equal to 22%. You’ll pay 0.45% annually. On a $700,000 home loan, that’s $3,150 every year, or $262.50 per month.
- Borrow more than $625,500, with a down payment greater than 10% but less than 22%. You’ll pay 0.70% annually. On a $700,000 home loan, that’s $4,900 a year, or about $408.33 per month.
- Borrow more than $625,500, with a down payment less than 10%. You’ll pay 0.95% annually. On a $700,000 home loan, that’s $6,650 a year, or about $554.17 per month.
Terms Greater Than 15 Years
Here’s what you can expect to pay if you have a loan term for longer than 15 years. The most common example of these types of loans is the 30-year term. Let’s say you:
- Borrow less than or equal to $625,500 for your home purchase and you have a down payment of 5% or more. You’ll pay 0.80% each year. On a $150,000 home loan, that’s $1,200 per year or $100 per month.
- Borrow less than or equal to $625,500 for your home purchase and you have a down payment of less than 5%. You’ll pay 0.85% each year. On a $150,000 home loan, that’s $1,275 per year or $106.25 per month.
- Borrow more than $625,500 for your home purchase and you have a down payment of 5% or more. You’ll pay 1% each year. On a $700,000 home loan, that’s $7,000 per year, or about $583.33 per month.
- Borrow more than $625,500 for your home purchase and you have a down payment of less than 5%. You’ll pay 1.05% each year. On a $700,000 home loan, that’s $7,350 per year, or about $612.50 per month.
How Long Do You Have To Pay For FHA Insurance?
Before 2013, MIP worked similarly to the private mortgage insurance that you pay on conventional loans. Once you reach 22% equity in your home, a conventional mortgage lender automatically cancels your PMI.
Today’s FHA lenders no longer cancel your MIP once you reach a certain home equity percentage. The amount of time you’ll need to pay MIP depends on your down payment. If you have at least 10% down at the time of your purchase, you’ll pay MIP for 11 years. If you have less than 10% down at the closing table, you’ll pay MIP for the entire term length.
Can You Avoid FHA Mortgage Insurance?
There’s no way to completely avoid paying MIP when you take an FHA loan. However, there are a few ways that you can lower what you pay. You can also take a few steps to plan ahead and stop paying a few years into your loan. Let’s take a look at a few methods you can use to reduce your MIP.
Save A Larger Down Payment
The easiest way to lower your MIP expenses with an FHA loan is to save more for a down payment. If you’re able to bring at least 10% to the closing table, you’ll qualify for a lower annual MIP payment. You’ll also lower the amount that you borrow, which results in a lower upfront premium. You can also stop paying for MIP in 11 years if you have a 10% down payment.
Here are a few strategies you can use to save more before you close on your loan.
- Pick up a side hustle. We live in a gig economy – and it’s never been easier to make extra money outside of your salaried position. Consider picking up a side hustle to earn some extra money to put toward your down payment. From walking dogs to transporting passengers with a ridesharing app, the possibilities are endless.
- Cut unnecessary items from your budget. Do you know how much money you spend per month on things like takeout and entertainment? If not, now is the perfect time to make a budget and funnel extra funds toward your down payment. Sit down with your budget and look for areas where you can afford to cut back. Saving as little as $5 per week will leave you with an extra $260 at the end of the year.
- Buy a less-expensive property. Lenders calculate your down payment as a percentage of your total property value. This means that the same dollar amount equals a higher down payment on a less-expensive property. Totally in love with a home that’s at the top of your budget? Consider explaining your situation to the seller and request a lower final selling price.
Refinance To A Conventional Loan
Many homeowners refinance to a conventional loan when they reach 20% equity. When you have a conventional loan, you don’t pay MIP. Instead, your lender might require you to pay PMI – but only if you have less than 20% down. You can stop paying MIP without switching to PMI by refinancing to a conventional loan once you’ve reached 20% equity.
To refinance to a conventional loan, you must meet your lender’s minimum requirements. Conventional loan requirements are stricter than FHA loan requirements, so you might need to take some time to build a better borrower profile before you refinance. To qualify for a conventional loan, you’ll need at least the following:
- A higher credit score: You must have a median FICO® Score of at least 620 points. Making your credit card and loan payments on time and limiting your spending can help you increase your score while you build equity.
- Debt-to-income ratio: You must have a DTI ratio of 50% or less to qualify for a conventional loan. You can decrease your DTI ratio by increasing your household income or paying down your debts.
- Home equity: You should have at least 20% equity in your home before you refinance. If you refinance before you have 20% equity, you’ll need to pay for PMI instead of MIP. PMI is more expensive than MIP, so be sure you have the right amount of equity before you refinance. If you aren’t sure how much equity you currently have, contact your lender.
Choose A Different Government Loan Type
If you really want to avoid MIP payments, you may want to consider another type of government loan.
You may be buying a home in a rural area and have a median FICO®Score of 640 or higher. In that case, why not consider a USDA loan? Unlike an FHA loan, USDA loans don’t require a down payment. You also don’t need to pay PMI or MIP with a USDA loan. Instead, you pay a monthly guarantee fee that’s less expensive than the FHA monthly premium.
On the other hand, you might want to consider a VA loan if you’re a current or former member of the armed forces or a qualifying spouse. To qualify for a VA loan, you’ll need a median FICO®credit score of at least 620 and a DTI ratio of 60% or less. There’s no down payment requirement for a VA loan. You also don’t have to pay any type of monthly mortgage insurance on a VA loan. Instead, you’ll pay a one-time VA funding fee – and the home must be your primary residence. Veterans receiving VA disability benefits and surviving spouses of veterans who passed in the line of duty or as a result of a service-connected disability are exempt from the funding fee.
Contact a Home Loan Expert to learn more about these FHA loan alternatives and to find out whether you qualify.
When you take out an FHA loan, you must pay an upfront mortgage insurance premium at the time of closing plus an annual mortgage insurance premium which would be divided into 12 monthly payments. The amount you’ll pay depends on the size of your loan and your down payment. The larger your down payment, the less you’ll pay annually.
You cannot cancel MIP payments. If you put at least 10% down on your loan, you’ll only need to pay MIP for 11 years of your loan. If you put less than 10% down, you’ll pay MIP for the entire life of your loan.
You may want to wait until you have at least 10% down before you buy a home to lessen your MIP payment amount. You can also refinance to a conventional loan after you have 20% equity in your property to remove the MIP requirement.
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