Understanding FHA Loans
An FHA loan is a mortgage that is insured by the Federal Housing Administration (FHA). It is designed to help low-to-moderate income borrowers who may have lower credit scores or limited down payment funds.
Mortgage Insurance Premium (MIP)
Because FHA loans have lower entry requirements, the FHA requires mortgage insurance to protect lenders in case of default. There are two parts to FHA mortgage insurance:
- Upfront MIP: A one-time fee of 1.75% of the base loan amount. This is typically rolled into the total loan balance and financed over the term.
- Annual MIP: An ongoing monthly fee. For most 30-year loans with less than 5% down, this is currently 0.55% of the loan amount per year.
Key Benefits
- Low Down Payment: Buy a home with as little as 3.5% down.
- Flexible Credit: Easier to qualify with a lower credit score than conventional loans.
- Gifts Allowed: 100% of your down payment can come from gift funds.
The Math Behind the Payment
Your total monthly payment consists of:
- Principal & Interest: Based on your total loan amount (including financed MIP) and current interest rate.
- Monthly MIP: 1/12th of your annual mortgage insurance premium.
- Escrow: Monthly portions of your annual property taxes and homeowners insurance.