Jun 222009
 

A brief primer on the difference between FHA Mortgage Insurance and its pale imitator: PMI or Private Mortgage Insurance.


The FHA mortgage insurance program has been around since 1934.
  This program was created under President Franklin Roosevelt’s New Deal to help turn a nation of renters into a nation of homeowners.  Back then, the rental rate was 70%, and FHA was instrumental in turning that around.

What the FHA or Federal Housing Administration does is it provides insurance for Lenders against foreclosure.   When an FHA loan goes bad, the FHA steps in, reimburses the Lender and takes the house in foreclosure.  Anytime you see “HUD Homes For Sale” those are FHA loans that went bad.

FHA has been absent for most of the “boom” years due to the limitations on loan amounts for any given geographic area.  These loan limitations are set through an act of Congress and are—by law—a percentage of the median price and the FNMA limit in a given area.   FHA was absent for most of the past ten years due to the low limit on lending.  For example, in the NY Metro region, the limit for a single family home was $362,000 (approx.).  The fact is, during those crazy times, you couldn’t find a single family home priced in the New York market unless you went very far afield, indeed, usually to a distant suburb.

As part of the 2008 stimulus package, Congress increased the permanent FHA limit to $625,000 (approx) for a single family home.   As part of President Obama’s 2009 stimulus package, that limit has been further increased to $729,250 through December 31st, 2009.  These numbers are not only more reasonable for our market place, but open up the FHA mortgage opportunity to so many more homebuyers.

FHA is, in my opinion, the “miracle loan.”  The Underwriting criteria, as set forth by FHA, is much more flexible than Conventional or Fannie Mae guidelines. FHA requires a purchaser or homeowner (in a refinance) to pay mortgage insurance regardless of the size of the downpayment.  In my humble opinion, this is a small price to pay for the excellent flexibility afforded by FHA guidelines, and the opportunity for homeownership opened up to so many more families.

PMI, or Private Mortgage Insurance, is the corporate, non-public version of mortgage insurance.  PMI companies came into existence to fill the gap left by the FHA loan limits.  For Conventional, or Fannie Mae/Freddie Mac loans, when a purchaser makes a downpayment of less than 20%, the Lender requires the purchaser to buy Private Mortgage Insurance to protect the Lender’s (riskier) investment.

Often, Realtors and clients will call FHA loans, or the attendant insurance premiums, “PMI.”   “Trevor, what is the monthly PMI on that FHA loan?”  The two programs are different. The FHA insurance is actually called, “MIP” for Mortgage Insurance Premium. There are two MIP’s when obtaining and FHA Insured mortgage loan.

The first is the Upfront Mortgage Insurance Premium, or UFMIP. This is typically 1.75% of the loan amount and is most often financed on top of the mortgage loan you need to purchase or refinance your home.


The second premium is the Monthly Mortgage Insurance Premium or MMIP.
This premium is included with your monthly mortgage payment to your Lender. The premium is calculated based on a percentage value of the loan amount determined by the amount of your downpayment (and in recent history, your credit score, although that requirement has been cancelled). You will pay this monthly premium until your equity position in the home reaches 78% of the value at time of closing. It may be possible to eliminate FHA MMIP after 5 years of good payment history.

The UFMIP is included in your principal and interest payment for the life of the loan. If you sell the home or refinance into a non-FHA mortgage, you may be entitled to a refund of a portion of the UFMIP.

More information about FHA loans can be found at the FHA website.


Hope that helps!

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