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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
What Is Upfront Mortgage Insurance Premium (UFMI)?
An insurance premium that is collected, on Federal Housing Administration (FHA) loans, at the initiation of the loan is called Upfront mortgage insurance premium.
It is not the same as private mortgage insurance (PMI), which is collected each month by a conventional private mortgage lender when the buyer pays less than 20% of the purchase price as a down payment.
Upfront mortgage insurance premiums are added to a pool of money that is used to help institutions, like the FHA, insure loans for certain borrowers.
Understanding Upfront Mortgage Insurance Premium (UFMI)
The motive of an FHA mortgage insurance is to protect the lender.
When the borrower has minimal equity in their homes, and if they default then it is a risk to the lender because the borrower doesn’t have much to lose when he walks away letting the bank foreclose.
The mortgage insurance will help your lender recoup his losses if you stop making your mortgage payments and walk away from your home.
An FHA loan has down-payment requirements of as low as 3.5% of a home’s price and it also doesn’t have very stringent income and credit requirements as compared to conventional loans.
So FHA loans require upfront mortgage insurance payment, that is collected at the time of closing.
A UFMIP of 0.55% is charged on FHA Streamline refinance loans.
You can either pay this amount in cash at the time of closing your loan, or you can choose to roll it into the total mortgage amount.
Borrowers have to pay an ongoing mortgage insurance premium (MIP), in addition to the UFMI.
The MIP range from 0.45% to 1.05% of the total mortgage and you will continue to pay this mortgage insurance till your loan to value ratio is higher, that is, till you have paid off a certain amount of your mortgage.
Then the insurance is no longer required. Borrowers whose loans are greater than 15 years require to make monthly mortgage insurance payments for five years. If the mortgage is less than 15 years, then the LTV ratio requirement is 78%.
The payments of upfront mortgage insurance premium are directly submitted 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.
Then the amount goes into an escrow account. A secure Internet collection portal is used by HUD to electronically process the collections.
This Collection Service:
- Satisfies the demand for electronic alternatives of agency and business partner by providing the ability to complete forms, make payments, and submit queries electronically via the Internet.
- It enables business partners and consumer users to access their payment accounts from any computer that has Internet access.
- It enables federal agencies to obtain and process collections in an efficient and timely manner.
Special Considerations
If the premiums for upfront mortgage insurance are paid all at once then people can be refunded on a pro-rated basis, and it will enable them to sell their home within the first five to seven years of ownership.
Meaning, they may be entitled to a substantial refund.
The homeowners are eligible for a refund and cancelation of their upfront mortgage insurance premium after five years if they have received their FHA loan before June 2013.
To be eligible, the homeowner must have 22% equity in the property and should have made all the payments on time.
For FHA loans issued after June 2013 homeowners must refinance into a conventional loan and have a current loan-to-value of 80% or more.
Avoid paying Upfront Mortgage Insurance Premium (UFMI)
Homebuyers can avoid paying upfront mortgage insurance by:
- Applying for a conventional mortgage loan: For conventional loans that have an 80% loan to value or less the lenders will not require upfront mortgage insurance. This applies to both primary home purchase and refinancing.
- A down payment of 20%: When a down payment for a home is equal to 20% or more than a homebuyer is not expected to pay for mortgage insurance.
- Opt for a second mortgage: With a 5% down payment a 15% second mortgage is required, for a 10% down payment 10% second mortgage required, so you can avoid mortgage insurance.
- Get help from the seller: A seller who has equity can finance a portion of the purchase price, with a second mortgage. So your 10% down payment and the seller’s 10% second mortgage can help you avoid mortgage insurance.
Conclusion
Upfront mortgage insurance (UFMI) is the 1.75% additional insurance premium that is collected on all Federal Housing Administration (FHA) loans.
So if the borrower defaults on his mortgage payments then it protects the lender.
UFMI payment can be done at the time of the loan closure or it can be rolled into the mortgage payments.
So it is an addition to the ongoing mortgage insurance premium payments.
It is a good idea to pay the amount of up-front mortgage insurance (UFMI) at the outset if you can afford it.
It will be a lot more expensive in the long run if you roll it into your loan.
