"Don't take an FHA loan, they're terrible" -random people on the internet

"Why not? My lender said I can't go conventional" - you

"because of the ufmip"

"what?"

"ufmip will eat you and your equity alive. Go conventional"

I'm writing this to let anyone who happens to need an FHA loan know that there is a way to take on an FHA loan without letting UFMIP eat you and your equity alive.

Things I'll cover:

  • What is UFMIP

  • How it impacts your equity (the numbers)

  • Monthly mortgage insurance differences between FHA and Conventional

  • The strategy to take on an FHA loan while protecting your equity

What is UFMIP

UFMIP stands for up-front mortgage insurance premium.

You've probably heard of mortgage insurance. But you might not have heard about up-front mortgage insurance.

Up-front means it's a lump sum amount charged as a closing cost.

That amount is a hefty sum. It's 1.75% of the loan amount.

You don't just pay mortgage insurance with your monthly payment. You pay the big chunk first, and THEN you pay it monthly.

Double time.

It's kind of like getting charged a setup fee, then the monthly fee.

Like cable (back in the stone ages) they used to charge a setup fee, then a monthly fee. Or a car lease. Or security systems. The equipment/activation fee, then the monthly fee.

Think of it like that. The UFMIP is the setup/activation fee, and the monthly mortgage insurance is the continued service.

How it impacts your equity

I don't want to call it deceitful how this is packaged. FHA loans can provide financing to people who otherwise wouldn't have gotten it.

But people just need to understand how it works, and loan officers try to hide it, or don't do a great job explaining it.

Rather than pay this fee out of pocket, FHA allows this fee to be wrapped into the loan. And that's what usually happens.

Let me show you how it works.

On a $400,000 purchase, an FHA loan requires 3.5% down payment.

That would be a $14,000 down payment with a loan amount of $386,000

Easy math so far.

Here's where UFMIP comes in.

UFMIP is 1.75% of the loan amount.

$386,000.00 x .0175 = $6,755

On your official Loan Estimate it shows the UFMIP fee with the word "financed" in parentheses.

That means they throw that $6,755 on top of the loan

So rather than a $386,000.00 loan amount, you have a $392,755 loan amount.

If you think about it a little more, your down payment doesn't directly pay a down payment. It pays the UFMIP, and the rest is applied as a down payment.

So rather than having 3.5% equity, you have 1.81% equity.

That's how UFMIP affects your equity.

Your down payment has less of an impact, because it's getting split between the UFMIP and the down.

Why do people still use FHA loans then?

If UFMIP hits you so hard, why do people still do FHA loans?

Because the alternative might be worse.

Conventional loans aren't for everybody.

Even if you have a credit score above the 620 threshold, it doesn't mean conventional is the answer.

To get the same rate FHA would offer might cost 2%-3% in buydown points. With Conventional loans, you pay the points out of pocket. Where UFMIP doesn't hit as hard with it being a financed cost.

The monthly conventional mortgage insurance might cost double the monthly mortgage insurance FHA offers.

That's one of the biggest differences here.

FHA charges a flat mortgage insurance amount.

Conventional charges a higher amount as the loan profile gets riskier and riskier.

Here's what I mean:

  • Conventional charges a higher mortgage insurance if your down payment is 3% rather than 5%

  • It's higher if your score is lower

  • It's higher if your debt-to-income ratio is higher

FHA borrowers don't worry about that. It's the same for everyone. 580 credit borrowers, 680 credit borrowers.

To FHA, it's all the same.

A little side note- if you have a credit score below 740, above 680, and the minimum down payment, you might want to at least consider an FHA loan side by side to see which option makes more sense.

One more difference between FHA and Conventional mortgage insurance is that FHA mortgage insurance will usually be for the life of the loan. You have to refinance to get out of it.

Conventional loans have options to drop the mortgage insurance without refinancing.

The strategy

Most people don't consider net worth, or equity, when making a decision between FHA and Conventional. They think "which loan offers the lowest monthly payment?"

But if you're a big-picture thinker, I want you to try this strategy.

The lender credit strategy

Don't take the par market-rate.

Go higher.

If you take a higher interest rate, something magical happens. You get money.

There's a give and take. If you take the higher interest rate, you end up with a higher monthly payment. But you have lower loan costs.

Tell your loan officer that you'd like to see an FHA loan option without financing the UFMIP.

The loan officer will look at you like you're crazy. Or might even call you crazy.

"that's not possible" -they might say.

"it is if you believe" -your reply

Here's a hypothetical example.

Say the par market rate for an FHA is 5.875%

You may be able to snag a 6.25% rate that comes with a 1.75% credit

  • 5.875% par rate

  • 6.25% rate with a large lender credit

That higher rate comes with a credit that offsets the UFMIP.

Lender credit + seller credit strategy

Let's keep this rolling.

Stack this on top of seller concessions.

This works especially well if you have large seller concessions. Seller concessions are credits that a seller can give toward your closing costs.

Use that money to pay for all of your closing costs, including the UFMIP. If it doesn't cover it all, ask for an interest rate that comes with a lender credit to cover the rest.

This makes it much easier to compare side by side with a conventional loan.

Compare to conventional

by taking the higher rate with a credit, you eliminate the UFMIP to make the loan products more similar.

FHA loans are usually lower than conventional anyway.

If you take the higher interest rate, eliminating UFMIP, you may still end up with a lower rate than going conventional. But it will be closer. In fact, conventional might be the lower rate. You'll want to compare it side by side.

The biggest thing you'll be comparing at this point is the rate, the closing costs, and the monthly mortgage insurance payment.

Summary

Don't avoid FHA loans because of the UFMIP. Now you know a way around the UFMIP

Use this strategy to be a smart mortgage shopper.

The closer you can make the loan products in similarity, the easier you can compare and shop.