Home buyers who obtain a loan are often expected to pay mortgage insurance, which protects the lender if the borrower fails to pay back the funds. There are several types of mortgage insurance home buyers may get, depending on the loan they were approved for, and the amount of money they put down.
Yes, FHA 203(k) loans require mortgage insurance. The Federal Housing Administration (FHA), the government agency insuring this loan, expects all borrowers to pay two types of mortgage insurance premiums.
Mortgage insurance premiums, also referred to as MIPs, are utilized by the FHA, since FHA loans, including 203(k) loans, require only a 3.5% down. Other qualifications, including credit history, are also on the more lenient side. Consequently, there’s a greater possibility that a borrower could default on the loan than if he or she qualified for a conventional loan.
The two types of FHA mortgage insurance premiums are: Upfront and Annual.
Borrowers pay an upfront mortgage insurance premium (UFMIP) at the closing table, which is currently 1.75% of the loan amount.
For example: You received a standard 203(k) loan to cover the purchase and major structural repairs of the property. Specifically, the loan equated to $500,000. At closing, you would need to pay $8,750, or $500,000 x 0.0175.
The down payment percentage is irrelevant.
As explained by the U.S. Department of Urban Housing and Development (HUD), which the FHA is a part of, an UFMIP applies to all FHA mortgages. There are some exceptions, however, including “Streamline Refinance and Simple Refinance Mortgages used to refinance a previous FHA-endorsed Mortgage on or before May 31, 2009,” as well as “Hawaiian Home Lands.”
An annual mortgage insurance premium is then paid on a monthly basis once the home has officially changed ownership. Unlike the UFMIP, an annual MIP doesn’t have a set rate. Instead, it’s determined based on several factors, including the loan amount and down payment. A borrower’s loan-to-value (LTV) ratio is also an important component. HUD even offers step-by-step guidelines on its official website that can help borrowers calculate their annual MIP. Furthermore, as stated in the aforementioned HUD document, annual MIPs have the same exceptions as UFMIPs.
Mortgage insurance, whether for an FHA 203(k) loan or another type of mortgage, offers borrowers flexibility in terms of their down payment.
Some borrowers may not necessarily think that mortgage insurance is advantageous for them, as, again, it was developed to help protect lenders. Still, it is beneficial for borrowers.
According to a NerdWallet online survey, among many first-time home buyers, specifically millennials, there seems to be some confusion in terms of down payment requirements. The personal finance resource site discusses the survey, conducted by Harris Poll and including 2,000 U.S. adult participants, in a September 2017 article, which states: “44% of Americans believe you need a down payment of 20% or more to buy a home.”
“While 20% is the down payment needed to get a conventional mortgage and not pay any private mortgage insurance, or PMI, it’s far from a hard-and-fast requirement for qualifying for a mortgage,” it continues.
In fact, there are several mortgage options in which no or a very low down payment is required. FHA loans are just one. These additional choices, aside from a conventional mortgage loan, gives more people the opportunity to become homeowners. As a result, mortgage insurance required by FHA 203(k) loans, and others, helps make it possible for lenders to offer such financial assistance.