The US Federal Housing Administration, also known as the FHA, provides a variety of mortgages to home buyers. These mortgages are fully backed by the federal government, making them some of the most reliable and transparent mortgages available to home buyers today. In exchange for gaining access to this funding, borrowers will be required to pay an FHA funding fee, commonly referred to as the Upfront Mortgage Insurance Premium, or UFMIP. Understanding how to calculate this fee will help ensure that you have all of the information you need to step into your mortgage lending with confidence.
An FHA UFMIP/VA Funding Fee is an upfront payment attached to federal mortgage lending for both military veterans and citizens. These payments are designed to help offset some of the default risk attached to these mortgages.
The Basics of FHA Lending
FHA mortgages, commonly referred to as FHA loans, are immensely popular borrowing platforms, particularly for first-time home buyers. This is due to the fact that the FHA allows individuals to make a 3.5 percent down payment rather than the standard 20 percent required by lenders in order to avoid purchasing private mortgage insurance, or PMI.
Additionally, the FHA mortgage platform allows individuals with less-than-stellar credit to secure borrowing. In many situations, new homebuyers may find that they are only eligible for FHA mortgages due to a variety of extenuating circumstances.
Understanding FHA UFMIP
As part of the mortgage approval process, home buyers are required to pay a mortgage insurance premium. This fee is designed to offset the risk the borrower will default on their loan. The UFMIP is a one-time, upfront payment that is equivalent to 1.75 percent of the property's value.
The home buyer is given two options with regards to paying this sum. They can either pay the fee immediately as part of closing costs or roll it into the mortgage payments. Given the fact that interest continues to accrue throughout the lifespan of the mortgage, home buyers will ultimately pay more than the 1.75 percent they were initially assessed if they add this fee into their total loan amount.
Other Premiums Attached to Mortgages
In addition to the UFMIP, borrowers will also be required to pay monthly insurance premiums. These premiums must be paid until the borrower's loan-to-value, or LTV, ratio reaches 80 percent or less. At this point, these premiums are no longer required by the FHA.
Exploring VA Funding Fees
Veterans who are ready to purchase a home can take advantage of VA loans. This form of borrowing does not require any form of down payment, nor does it stipulate that borrowers must pay a monthly insurance premium. However, funding fees will be assessed and assigned based on the purchase price of the property in question.
Currently, the basic funding fee is equivalent to 2.15 percent of the home's value. That being said, if borrowers are willing to make a down payment of at least five percent of the home's value, the funding fee will dip to 1.75 percent. Ultimately, it is up to the borrower to determine precisely how much money they would like to allocate to a down payment, if any. Although certain benefits are attached to a down payment, making this payment is not required.
Ryan Cockerham is a nationally recognized author specializing in all things innovation, business and creativity. His work has served the business, nonprofit and political community. Ryan's work has been featured at Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.