FHA Loan costs
FHA loans are mortgages insured by the Federal Housing Administration. They are popular because borrowers with a FICO credit score of at least 580 can take out one of these loans with a down payment as low as 3.5% of their home’s purchase price.
These loans are also attractive to borrowers with lower credit scores. FHA guidelines state that you can qualify for one of these loans with a credit score as low as 500, though if your score is 500 to 579, you’ll need to provide a down payment of at least 10% of your home’s purchase price.
While FHA loans have expanded homeownership opportunities for more borrowers, there are drawbacks to these loans. The biggest? Mortgage insurance premiums.
What are mortgage insurance premiums?
FHA loans come with two types of mortgage insurance premiums: one that borrowers pay upfront at closing and another that they pay each year.
Mortgage insurance premiums don’t protect borrowers. Instead, they protect your lender if you default on your loan.
All FHA borrowers must pay the upfront mortgage insurance premium when they take out an FHA loan. This premium is equal to 1.75% of your loan amount. If you borrow $300,000, you’ll pay an upfront mortgage insurance premium of $5,250.
You can either pay this in one lump sum or roll the premium into your mortgage. If you choose the second option, you’ll pay slightly more with each mortgage payment to pay off the premium.
You'll also pay an annual mortgage insurance premium, with most borrowers paying it for the life of their loan. The amount you pay depends on your loan amount and loan-to-value ratio. The size of your down payment determines your loan-to-value ratio. If you make a 20% down payment, your loan-to-value ratio is 80%.
If you take out a mortgage with a term of more than 15 years, borrow $726,200 or less and provide a down payment of 10% or less, your annual mortgage insurance premium will be 0.50% of your loan amount, and you'll need to pay this for 11 years.
If your loan-to-value ratio is more than 90% and less than or equal to 95%, your annual mortgage insurance premium will be 0.50% of your loan amount, but you'll need to pay this premium for the entirety of your loan term.
Think about it
As you can see, while FHA loans are a good option for many borrowers, they do come with extra costs. Make sure to consider mortgage insurance premiums when deciding whether this type of mortgage is right for you.
And if your loan-to-value ratio is more than 95% -- which means you provided a down payment of less than 5% -- your annual mortgage insurance premium will be 0.55% and will last for your loan's entire term.
If you borrow more than $726,200 and your LTV ratio is 90% or less, your annual mortgage insurance premium will be 0.70% of your loan amount, and you'll pay it for 11 years. If your LTV is between 90% and 95%, your annual mortgage insurance premium will be 0.70%, and you'll need to pay it for the life of your loan. If your loan-to-value ratio is more than 95%, your annual mortgage insurance premium will be 0.75% and last the entirety of your loan.
The numbers are different if you take out a mortgage with a term of 15 years or less. In these cases, depending on how much you borrow and your loan-to-value ratio, your annual mortgage insurance premium will range from 0.15% of your loan amount to 0.65%. The bottom line? Work closely with real estate and financial professionals to find out what is best for you.