FHA Upfront MIP: How It Is Financed Into the Loan and What It Means for LTV

FHA charges an upfront mortgage insurance premium (UFMIP) of 1.75% of the base loan amount on virtually all FHA-insured loans. Most borrowers finance this premium into the loan rather than paying it at closing, which increases the total loan amount beyond what the property was purchased for. Understanding how this affects the LTV calculation and the borrower's true costs is essential for every FHA-originating MLO.

How the Financed UFMIP Affects the Loan Amount

When a borrower finances the UFMIP, the lender adds 1.75% of the base loan amount to the total loan. On a $400,000 purchase with 3.5% down ($14,000), the base loan is $386,000. The UFMIP of $6,755 (1.75% of $386,000) is added, resulting in a total loan amount of $392,755. This is the amount on which the monthly amortization is calculated.

LTV Calculation with Financed UFMIP

• ✦FHA calculates the LTV for insurance purposes on the base loan amount before the UFMIP is added
• ✦The UFMIP does not cause the loan to exceed the FHA LTV limits for qualification purposes
• ✦However, the financed UFMIP does mean the borrower immediately owes more than the purchase price on day one
• ✦If the property appraises at exactly the purchase price, the financed UFMIP creates a situation where the borrower has negative equity above the down payment on a technical basis

Annual MIP Duration

For FHA loans with LTV above 90% at origination, annual MIP runs for the life of the loan. For LTV at or below 90% (i.e., 10% or more down), annual MIP cancels at 11 years. This means borrowers putting exactly 3.5% down will pay annual MIP indefinitely unless they refinance into a conventional loan once they reach 20% equity. This MIP duration is one of the primary factors that makes conventional loans more cost-effective for borrowers with good credit.

Partial UFMIP Refunds

FHA provides partial refunds of the UFMIP on a declining schedule if a borrower refinances into another FHA loan within 3 years. The refund is applied as a credit against the new loan's UFMIP. By year 3, the refund is typically minimal. If the borrower refinances into a conventional loan, no UFMIP refund is available regardless of how recently the FHA loan was originated.