Upfront mortgage insurance is a type of insurance that protects lenders who issue FHA-approved loans to higher-risk borrowers. Paid at the time of closing, the current cost of upfront mortgage insurance is 1.75% of the home’s purchase price.

Why do I need to pay upfront mortgage insurance?

FHA loans have looser approval requirements and a lower minimum down payment (as low as 3.5%), which means that buyers who may not be able to get a conventional loan can still qualify.

These borrowers, however, present a higher risk of default for several potential reasons:

• Lower income to debt ratio
• Lower credit score
• Lower percentage of home equity post-closing

FHA borrowers are more likely to face difficulties in paying their mortgage and have less to lose if they simply walk away from the loan. Upfront mortgage insurance protects the lender should this happen, while also supporting the programs that help people with more challenging finances to achieve home ownership.

Is upfront mortgage insurance the same as PMI?

Upfront mortgage insurance and private mortgage insurance are similar, in that they both protect lenders from loan defaults, but PMI is only applied to conventional loans when the buyer’s down payment is less than 20% of the purchase price.

Does this mean I do not need to pay a monthly mortgage insurance premium with an FHA loan?

While FHA loans do not require PMI, you will still need to pay a monthly mortgage insurance premium (MIP) for as long as your home equity is less than 22% of the balance of your loan. It is important to understand that upfront mortgage insurance is in addition to the monthly insurance payment.

What if I sell my home? Am I entitled to a partial refund for the premiums I paid upfront?

Homeowners who sell their FHA-financed home within the first 5-7 years after purchase may be entitled to a prorated refund of the upfront mortgage insurance premiums.

How can I avoid paying upfront mortgage insurance?

The best way to avoid paying upfront mortgage insurance is to apply for a conventional loan. If you are unsure as to whether a conventional or FHA loan is right for you, an experienced mortgage broker can help. Call Lenderment and we’ll be happy to discuss your unique situation and help you find the best mortgage solution for your circumstances.

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