• Upfront mortgage insurance premium (UFMIP) and private mortgage insurance (PMI) make homeownership accessible to Americans with modest incomes.

• The unemployment rate is at a historic low, but homeownership remains an unachievable dream for medium-income Americans.  In many big cities, buying a home will take 10-plus years to save for a 20% mortgage down payment on the median-priced home.

• The upfront mortgage insurance premium (UFMIP) is an insurance premium that the Federal Housing Administration collects. The UFMIP is usually 1.75 percent of the purchased price.

• Non-FHA or conventional loans charge private mortgage insurance (PMI) if the borrower puts less than 20% down payment.

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The unemployment rate is at a historic low, but homeownership remains an unachievable dream for medium-income Americans.  In many big cities, buying a home will take 10-plus years to save for a 20% mortgage down payment on the median-priced home.

The housing affordability crisis makes the Federal Housing Administration (FHA) loans and private, affordable loan mortgages attractive products.  FHA’s upfront mortgage insurance premium (UFMIP) or private mortgage insurance (PMI) can make the loans mentioned above mortgages more expensive.

FHA Upfront Mortgage Insurance Premium (UFMIP)

Potential homebuyers can get FHA loans with a down payment of as little as 3.5 percent and credit score as low as 500. Credit scores between 500 and 580 require a 10% down payment. 

The upfront mortgage insurance premium (UFMIP) is an insurance premium that the Federal Housing Administration collects. The UFMIP is usually 1.75 percent of the purchased price.  All FHA borrowers pay that upfront insurance premium.  Also, your loan may come with annual mortgage insurance premium (MIP)

A private lender issues the FHA loan, and the government promises to pay the lender if the borrower defaults on the mortgage.

So, if you financed a 300k home, the UFMIP could cost as much as $5,250 ($300,000 x 1.75%).  Keep in mind that the UFMIP is an addition to regular mortgage fees and other costs.

Private Mortgage Insurance (PMI)

Private lenders offer affordable loan mortgages with low down payment and modest credit scores, but the Federal Housing Administration does not guarantee their loans.  Non-FHA or conventional loans charge private mortgage insurance (PMI) if the borrower puts less than 20% down payment.

The PMI can be as high as 1.05% of the purchased price, but there is no upfront insurance premium.

So, if you financed a 300k home, the PMI could cost as much as $3,150 ($300,000 x 1.05%) each year or an additional $262 to your monthly mortgage payment.

Can I Avoid the FHA Upfront Mortgage Insurance Premium or Private Mortgage Insurance?

Unless you have a 20% down payment, you can avoid neither the FHA upfront mortgage insurance premium or the private mortgage.  You will have to do your research and decide whether you want to get an FHA or conventional loan.

Since the government backs FHA loans, they have higher inspection standards, credit score can be as low as 500, and lenders adhere by the same rules, most of the time. 

Conventional loans have no UFMIP, but lenders can charge higher mortgage rates and fees.