What is an FHA Mortgage?

The FHA (Federal Housing Administration) does not issue mortgage loans itself, but instead approves lenders to issue mortgage loans underwritten based on guidelines the FHA issues.  Subsequently, they also insure the mortgage loans issued by those lenders against any potential loss.

What types of refinance mortgages does FHA insure?

There are two types of mortgage refinance available per FHA guidelines: FHA cash-out refinance, and FHA streamline refinance. Each of these is outlined below.

FHA Cash-Out Refinance

The FHA cash out refinance is for homeownersthat are looking to refinance their existing mortgage while also converting some of the existing equity in the home into cash.

FHA Cash –Out Refinance Basics

• If the existing mortgage on the property is seasoned for at least 12 months and each of the last 12 payments have been made within the month in which they were due the LTV can be as high as 95%. In the event that the existing mortgage has not been seasoned for at least 12 months, the LTV of the refinance transaction cannot exceed 85%
• Borrowers must meet lender credit and DTI requirements
• Current appraised value is used in determining maximum loan amount

FHA Streamline Refinance

An FHA Streamline refinance is for homeowners whose property is currently secured by an FHA mortgage and who would like to refinance into another FHA mortgage in order to lower their interest rate and monthly payment.

FHA Streamline Refinance Basics

• Borrowers must be current on their existing mortgage and have an acceptable payment history
• Borrowers must meet lender credit and DTI requirements
• Non-occupant co-borrowers may be added to the loan

What are the benefits of an FHA refinance mortgage loan?

• Lower credit scores allowed than on conventional mortgage loans – in some cases down to a 580 mid-FICO
• Higher allowable debt-to-income (DTI) ratios than conventional mortgage loans – sometimes over 50%
• Typically interest rates are lower than those on conventional mortgage loans
• Single Family Residences (SFR), 2-4 Family homes, and condos are all eligible property types
• A variety of amortization options are available including 30 year fixed rate, 15 year fixed rate, and some ARM’s
• No maximum income limits

What is FHA Mortgage Insurance?

Mortgage insurance is a policy that protects lenders against losses that result from defaults on home mortgages and is required on every FHA mortgage loan. Unlike conventional loans, the amount of FHA mortgage insurance is not based on your credit score or debt-to-income ratio,but rather is based on a fixed percentage of your loan amount.

FHA Mortgage Insurance comes in two flavors; UPMIP (Up-Front Mortgage Insurance Premium), and MIP (annual Mortgage Insurance Premium).

The UPMIP amount is an up-front fee that is paid to the lender which issues the FHA mortgage loan and is usually rolled into the loan itself. The amount of the UPMIP is calculated by multiplying the FHA loan amount by the FHA UPMIP Rate which is currently 1.75%.

Example of UPMIP Calculation for an FHA loan amount of $200,000:

$200,000 x .0175 = $3500 UPMIP

The FHA Announced on 1/8/2015 that they were lowering the factor used to calculate monthly MIP in 2015. The new factor used to calculate monthly mortgage insurance amounts was lowered from 1.35% to .85% resulting in significant savings for FHA buyers.

MIP is initially calculated annually but is actually paid monthly in addition to your normal PITI payment.  It is calculated by multiplying the original loan amount by the current FHA MIP rate (.85% for FHA mortgage loans with an LTV of 95% or higher or .80% for FHA mortgage loans with an LTV of less than 95%).

Example of MIP calculation for an FHA loan amount of $200,000 with an LTV of 96.5% using the current MIP factor (note upcoming changes to the MIP factor below):

$200,000 x .0085 = $1700 annual MIP

In order to determine the monthly MIP payment amount simply divide the annual MIP amount by 12 months as shown here:

$1700 annual MIP divided by 12 months = $142 monthly MI

How long would I have to pay FHA Mortgage Insurance?

FHA made changes to the rules regarding MI in 2013. For loans with FHA case numbers issued after June 3, 2013 the rules are as follows:

For loans with a starting LTV of 90% or greater, MIP is required for the life of the loan

For loans with a starting LTV of less than 90%, the MIP must be paid for 11 years

Can I get rid of the FHA MIP if I refinance?

Yes, but only if you were to refinance your FHA mortgage loan into a conventional mortgage loan. It is also important to keep in mind that conventional mortgage loans with an LTV of 80% or greater also have a monthly mortgage insurance component known as PMI (Private Mortgage Insurance). PMI on conventional mortgage loans is typically much lower than the MIP on FHA mortgage loans.

Can FHA Mortgage Insurance rates change?

FHA mortgage insurance rates can change and changes have been rolled out as recently as January of 2015 when the monthly MI rate was lowered from 1.35% annually to .85% annually.

What is the maximum loan amount for an FHA mortgage?

The maximum loan amount for an FHA mortgage varies by county and property type. The current maximum FHA loan amounts for the state of Arizona are shown below.