Editor’s Note: This blog was originally published in November 2018 and has been revised to reflect industry updates.
Yes, FHA 203(k) loans require mortgage insurance. The Federal Housing Administration (FHA), the government agency insuring this loan, requires all borrowers to pay two types of mortgage insurance premiums (MIPs): Upfront (UFMIP) and Annual.
When obtaining any government-backed financing products, such as FHA 203(k) rehab loans, borrowers can put down as little as 3.5 percent with low credit scores and debt-to-income (DTI) ratios.
Such relaxed requirements require added assurance on behalf of the borrower through MIPs. Designed to benefit the lender and government agency, these protect both parties, even if the borrower defaults.
There are several types of mortgage insurance options, depending on the approved loan, down payment and other factors.
Here we discuss FHA 203(k) MIPs, including requirements, various types, advantages, and more.
While private mortgage insurance (PMI) isn’t necessary, upfront guarantees and annual fees are still required—the former is 1.75 percent of the loan, the latter 0.35 of outstanding principal. These pertain to any down payment.
A UFMIP applies to all FHA mortgages. An annual mortgage insurance premium is then paid monthly once the home officially changes ownership. Unlike the UFMIP, an annual MIP doesn’t have a set rate. Instead, it’s determined by several factors, including loan amount and down payment. A borrower’s loan-to-value (LTV) ratio is also important. Annual MIPs feature the same exceptions as UFMIPs.
For guidance on MIP formulas and amounts, consult the HUD Monthly (Periodic) Mortgage Insurance Premium Calculation steps and examples.
Borrowers putting down at least 10 percent or more at closing can cease MIPs after 11 years. For lower down payments, MIPs are required until the loan is forgiven, or refinanced through an equity-based conventional loan.
There are two types of FHA 203(k) loans: Standard and Limited.
Sometimes referred to as Streamlined, a Limited 203(k) permits up to $35,000 for repairs and improvements, such as flooring, appliances, and other cosmetic upgrades.
A Standard 203(k) loan is suited for more complex repairs attributed to flooding and other natural disasters. If you received a standard FHA 203(k) loan for $500,000 to cover the purchase and major structural repairs, for example, you would pay $8,750, or $500,000 x 0.0175 at closing.
Note all FHA Mortgage Limits are based on geographic location.
There are several mortgage options requiring little to no down payment that further assist first-time homebuyers. MIPs required by FHA 203(k) loans provide enhanced protection to lenders, and thus, increase opportunities for potential borrowers to purchase their dream homes.
It can be daunting to understand the various insurance and financial requirements of an FHA 203(k) loan. With professional guidance and updated information, borrowers can effectively calculate all expenses prior to closing.
Contour Mortgage offers various renovation financing products, including FHA 203(k) loans, and others. Contact us today to speak with one of our experienced representatives.