Up-Front Mortgage Insurance UFMI Definition and Calculation
Up-Front Mortgage Insurance (UFMI): Definition and Calculation
What Is Up-Front Mortgage Insurance (UFMI)?
Up-front mortgage insurance is an insurance premium collected on Federal Housing Administration (FHA) loans at the time of loan initiation.
It is different from private mortgage insurance (PMI), which mortgage lenders collect monthly on homes purchased with a down payment of less than 20% of the purchase price. Up-front mortgage premiums contribute to a pool of funds used by entities like the FHA to insure loans for specific borrowers.
Key Takeaways
– Up-front mortgage insurance (UFMI) is an additional premium of 1.75% collected on FHA loans.
– UFMI protects lenders if borrowers default on their mortgage payments.
– UFMI can be paid at loan closing or rolled into mortgage payments. It is separate from ongoing mortgage insurance premium payments.
Understanding Up-Front Mortgage Insurance (UFMI)
Like PMI, FHA mortgage insurance safeguards lenders. When borrowers have minimal home equity, the risk of default is higher because borrowers have less to lose by walking away and allowing foreclosure. Mortgage insurance helps lenders recover their losses in the event of default.
FHA loans have lower down-payment requirements (as low as 3.5% of a home’s price) and less stringent income and credit requirements than conventional loans. Consequently, these loans require up-front mortgage insurance payment at closing.
Since 2015, the up-front mortgage insurance rate has been 1.75% of the base loan price. FHA Streamline refinance loans have a UFMIP rate of 0.55%. Borrowers can choose to pay this amount in cash at closing, but many roll it into their total mortgage amount.
If you can afford to pay the up-front mortgage insurance (UFMI) amount upfront, it is advisable to do so. Rolling it into the loan will be costlier in the long run.
In addition to UFMI, borrowers must pay ongoing mortgage insurance premiums (MIP) ranging from 0.45% to 1.05% of the total mortgage. Borrowers must continue paying mortgage insurance until their loan-to-value ratio is low enough, usually when they have repaid a certain portion of their mortgage. When equity reaches a sufficient level (e.g., 22% for an FHA loan), lenders face less risk if borrowers default, and insurance is no longer required. Loans with terms longer than 15 years require the payment of monthly mortgage insurance for five years, while loans shorter than 15 years only require a 78% loan-to-value ratio.
Up-front mortgage insurance premium payments are sent directly to the U.S. Department of Housing and Urban Development (HUD) and collected by the U.S. Department of the Treasury’s automated collection service, which places the funds into an escrow account.
HUD uses a secure Internet collection portal that satisfies the demand for electronic alternatives, allowing users to complete forms, make payments, and submit queries electronically. This service enables federal agencies to process collections efficiently and in a timely manner.
Special Considerations
Many people are unaware that they can receive a pro-rated refund of up-front mortgage insurance premiums if they paid in full and sell their home within the first five to seven years of ownership.
For FHA loans received before June 2013, homeowners are eligible for a refund and cancellation of their up-front mortgage insurance premium after five years, provided they have 22% equity in the property and have made all payments on time. For FHA loans issued after June 2013, homeowners must refinance into a conventional loan with a loan-to-value of 80% or higher.
Tips to Avoid Paying Up-Front Mortgage Insurance (UFMI)
Home buyers can avoid paying upfront mortgage insurance by:
– Applying for a conventional mortgage loan: Mortgage lenders do not require upfront mortgage insurance for conventional loans with an 80% loan-to-value or less.
– Making a 20% down payment: When a down payment for a home is equal to 20% or more, mortgage lenders assume less risk, and mortgage insurance is not required.
– Getting a second mortgage: A 5% down payment would require a 15% second mortgage, and a 10% down payment would require a 10% second mortgage to reach the 20% threshold and avoid mortgage insurance.
– Seeking assistance from the seller: A seller with equity may choose to finance a portion of the purchase price via a second mortgage. Combining a 10% down payment with a seller’s 10% second mortgage eliminates the need for mortgage insurance.
Is UFMI Refundable?
The Upfront Mortgage Insurance (USMI) premium is generally not refundable except when refinancing to a new FHA-insured mortgage within three years of the original loan.
How Is the FHA UFMI Premium Calculated?
The UFMI premium required by the FHA on a mortgage is 1.75% of the loan amount. For example, if the initial loan is $200,000, the UFMI premium would be $3,500, making the mortgage amount $203,500.
Can the UFMI Be Paid in Cash or Financed Into the Loan Payments?
The UFMI premium can be paid in cash or financed into the loan amount, but it must be paid entirely using one method, not split. Cash payments for UFMI are added to the total cash settlement requirements.
