Discover what the first time home buyers FHA mortgage insurance fee is and why it is necessary below.
Is this something I really must pay? Can I get help in paying it?
This mortgage insurance fee is a hidden cost that many people do not think about.
Since FHA requires mortgage insurance premium (MIP) on many of its loan programs, you may be required to pay this. It is to be paid upfront at the closing.
For many new home buyers, this upfront cost can
be paid by the seller. Depending on how you negotiate the purchase contract, this could be no out of pocket money for you.
If you think you are ready, be sure to get a loan that works well with first time home buyers.
By being aware of this ahead of time, you can get your negotiations in place so you don't have to pay the upfront cost.
If the seller doesn't pay it, then, you need to be aware of this cost since it can affect how much money you need at the closing table. First let's talk about why this fee is charged.
This mortgage insurance is like having a life ring around your mortgage dollars. It does not really protect you though. It protects the lender.
There is a benefit though, since it protects the lender, they are more willing to loan you the money. You see, first time home buyers are considered a higher risk. They usually have less than perfect credit, need help with the down payment and other things that makes their loan harder to obtain.
First time home buyers FHA mortgage insurance helps the lender to consider you for the loan.
You will also have a monthly MIP to pay which will be included in your PITI (principle, interest, taxes, and insurance). I tell people to look at it like an increase to your interest rate because in reality that’s exactly what it is. It never goes away until you sell the house or refinance it.
Since FHA loans are used by mostly first time home buyers, the MIP is usually higher than on a conventional loan because it’s considered a higher risk loan. On a FHA purchase you will be charged a percent of the sale price upfront and there is an annual renewal rate for this as well.
Conventional loans could be as low as .50% (with a 5% or more down payment) and renewals are as low as .30% in subsequent years. When you pay your balance down below 80% on conventional loans it drops off and you do not have to pay MIP any longer.
On FHA loans, the monthly MIP never stops regardless of how much you pay down on the balance of your loan. So its a good idea to refinance once your loan is below the 80% LTV so you don't have to pay this premium any longer.
I have an awesome calculator to help you figure your FHA closing costs. Be sure to take some time to explore it.
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