The FHA Mortgage Program enables you to buy a home with a down payment as low as 3.5% and requires a minimum credit score of only 580. FHA mortgage rates tend to be lower than rates for conventional mortgage programs but you are required to pay an upfront and ongoing monthly FHA mortgage insurance premium (MIP) on top of standard closing costs and your mortgage payment. In short, the FHA MIP provides insurance that protects lenders in the event that you default on your mortgage and cannot repay your loan. The up-front MIP for most FHA mortgages is 1.75% of the loan amount and the ongoing monthly MIP fee depends on mortgage amount, loan-to-value (LTV) ratio and mortgage length. We provide a comprehensive overview of the FHA Mortgage Program on FREEandCLEAR, including a detailed explanation of the FHA MIP. You can also use our FHA Mortgage Calculator to determine the upfront and ongoing FHA MIP for any FHA loan.
You pay the ongoing FHA MIP with your monthly mortgage payment but you pay the upfront FHA mortgage insurance premium (MIP) at closing. The upfront FHA MIP is typically financed which means it is added to your mortgage. If you choose to finance the upfront FHA MIP, the amount of the upfront MIP is added to your loan amount and when your mortgage closes, those funds are simultaneously transferred from the lender to pay the upfront MIP. For example, the upfront MIP for a $100,000 FHA mortgage is $1,750 ($100,000 (base loan amount) * 1.75% = $1,750). If you finance the upfront FHA MIP, you add the fee to your base mortgage amount so in this example the total loan amount is $101,750 ($100,000 (base loan amount) + $1,750 (upfront FHA MIP) = $101,750 (total mortgage amount)).
You can also elect to pay the upfront FHA MIP out-of-pocket from your personal funds, such as a bank account, in which case the MIP is not financed and not added to your loan amount. You should notify your lender at the beginning of the mortgage process if you want to pay for the upfront FHA MIP using out-of-pocket funds. Either way, you are required to pay the upfront FHA MIP when your mortgage closes and the money either comes from your personal funds or from your loan proceeds. Even though the upfront FHA MIP fee may appear two times on your closing documents -- under closing costs you are required to pay in addition to being added to your loan amount -- I doubt that your lender is trying to charge you twice for the same fee as that would be mortgage fraud. And because the FHA program is backed by the federal government, the penalty for mortgage fraud is especially severe.
If you are not comfortable with the fees being charged by the lender you should ask for an explanation. If you are not satisfied with the explanation you can cancel your mortgage any time prior to signing loan documents. If you do decide to switch lenders, we always recommend that you shop multiple lenders to find the best mortgage terms. You can review FHA lenders in your area by clicking FHA MORTGAGE RATES