UPMIP stands for Up Front Mortgage Insurance Premium. This is a fee charged to FHA home buyers to initiate escrow in their mortgage insurance account. This is very similar to the funding fee for VA loans.
As of 2011, FHA loans require 3.5 percent down, and require a home buyer to pay an upfront mortgage insurance fee of 1 percent of the loan amount as well as a monthly mortgage insurance premium of 0.9 percent on the loan until the home buyer reaches 20 percent equity.
VA loans require no down payment for eligible veterans, and do not require a monthly mortgage insurance premium. However, funding fees are charged as a percentage of the sales price.
In many cases, the buyers can finance the UFMIP or VA funding fee as part of the loan, providing that they qualify for the monthly payment should they do so.
For VA loans only, the funding fee can be waived if the eligible veteran is over 40 percent disabled. In these cases, the veteran must be qualified as disabled through a military medical facility.
Lenders require the up front mortgage insurance premium and the VA funding fee to help protect them against loss in the event of a foreclosure. It helps to offset the costs of foreclosure filing fees and the total amount of the loss if the bank has to repossess the house.
It's beneficial to pay the mortgage insurance premium and VA funding fee (if finances allow) up front, as this can be used as a tax deduction at the end of the year. The buyer should budget this into closing costs if possible.