What Is an Upfront Mortgage Insurance Premium (UFMIP)?

Definition and Examples of an Upfront Mortgage Insurance Premium (UFMIP)

A UFMIP is an additional fee you’ll pay to your lender when closing on your FHA mortgage. This one-time payment helps protect your lender if you’re unable to repay your loan. The UFMIP is 1.75% of the base loan amount (the part of the home’s price you will be financing with a mortgage) and may be rolled into your monthly mortgage payments.

• Acronym: UFMIP

How UFMIPs Work

If you were to take out a conventional mortgage, you may pay as much as 20% or more as your down payment. This type of expense may be out of reach for some homebuyers, so FHA loans exist to help borrowers who otherwise can’t afford a mortgage.

If you wanted to get an FHA loan, you’d apply through a lender, and the FHA would guarantee the loan. At closing, you’d pay a UFMIP of 1.75% of your mortgage on top of the down payment to the lender. The UFMIP funds are then paid to HUD by your lender. They help protect the lender and the FHA in case you default on your mortgage.

For example, say you want to buy a home that costs $300,000. You are approved for an FHA loan and are expected to make a down payment of at least 3.5% of the purchase price, which is $10,500. When you close on the home, you’ll also need to pay a UFMIP of 1.75% of the base loan amount, which is the part of your home you’ll finance through the mortgage. If the home is $300,000, and you’ll put down $10,500, you’ll pay 1.75% on $289,500, which is $5,066.25. This means you need at least $15,566.25 in cash ready at closing (plus any money you’ll need for other fees).

Pros and Cons of UFMIPs

Pros Explained

• Makes it easier to qualify for a mortgage: Because of safeguards like UFMIP, the government is able to back FHA loans. This gives more options to borrowers who would normally have a hard time qualifying for a conventional mortgage.
• Lower down-payment requirements: The UFMIP is 1.75% of the base loan amount. While it is an additional cost, the down payment is lower than a conventional mortgage, which may still make this more affordable than your other home loan options.

Cons Explained 

• Additional upfront cost required: When you close on your home, you’ll be required to make a one-time payment of 1.75% of the mortgage. This fee is in addition to other closing costs and expenses that come with buying a home. UFMIP drives up the total cost of purchasing a home, which can be hard for borrowers if they have limited financial resources. 
• Still required to pay an annual mortgage insurance premium: The UFMIP isn’t the only mortgage insurance fee you’ll need to pay; there’s still an annual one (more on that below).

Upfront Mortgage Insurance Premium vs. Annual Mortgage Insurance Premium

In addition to paying UFMIP, FHA borrowers are required to pay an annual mortgage insurance premium (AMIP). The main difference between the two types of insurance premiums is that the UFMIP is a one-time payment due at closing, whereas the AMIP is an ongoing monthly expense.

The AMIP is calculated annually and paid on a monthly basis. The exact cost of the AMIP varies depending on the loan amount, whether you took out a 15-year or 30-year mortgage, and your current loan-to-value (LTV) ratio. The total cost of the AMIP ranges between 0.45% and 1.05%. 

How To Avoid Paying UFMIP

If you want to avoid paying the additional cost that is a UFMIP, you’ll need to apply for a conventional mortgage that is not backed by the FHA. This means making a larger down payment, sometimes 20% or more of the home’s purchase price. However, doing so will also help you avoid paying AMIP, which can add up over the course of your loan term.