MI vs. FHA: A Closer Look at Borrower Costs
June 27, 2016 / Peter May, Vice President, Strategic Accounts
There's clearly a growing need for mortgage insurance (MI) in today's market. The National Association of Realtors has estimated that it can take a prospective home buyer 12 years to save up enough money to make the 20 percent down payment lenders typically require—which is $46,500 on a median-priced existing home ($232,500).
Federal Housing Administration (FHA) loans are designed to meet the needs of underserved buyers who may not qualify for a conventional loan due to factors like credit history. But, with the added expense of FHA, these loans are often a poor match for well-qualified home buyers.
In fact, FHA MI can cost three times more than private MI over the life of the loan!
By opting for private MI, borrowers are able to save more up front and over the life of the loan. The total monthly payment for a loan with a lender-paid single policy from United Guaranty is $984 a month on a $200,000 loan, substantially lower than the FHA-financed $1,055 per month.
Mortgage insurance from United Guaranty can be cancelled when it's no longer needed; or the servicer will cancel it automatically at 78 percent LTV. FHA MI is not cancellable on loans with a down payment of less than 10 percent. For larger down payments, FHA MI is cancellable after 11 years.
Mortgage insurance gives borrowers power
Private mortgage insurance offers buyers faster closings, low monthly payments, and an ability to cancel MI. But these are just some of the advantages of choosing to go with a conventional loan with private MI rather than an FHA loan. By opting for private MI, borrowers are able to save more up front and over the life of the loan. The total monthly payment for a loan with a lender-paid single policy from United Guaranty is $984 a month on a $200,000 loan, substantially lower than the FHA-financed $1,055 per month.
Over a period of five years, savings from lender-paid private MI can save a borrower $8,552 compared to FHA. For more information, including the assumptions these calculations are based on, see our Borrowers Save More page.
When FHA may be appropriate
Buyers with special circumstances and those lacking the credit score necessary for qualifying for a conventional loan may find answers with an FHA loan. For example, a borrower with a 630 credit score and a 3.5 percent down payment wouldn't likely receive a conventional loan, but the FHA could give that home buyer consideration.
United Guaranty, meanwhile, offers the flexibility of down payments as low as 3 percent for borrowers who qualify.
Until recently, MI providers typically did not allow gifts from a friend or relative to satisfy the borrower's minimum contribution requirement—while FHA allowed gifts and grants under certain circumstances. That has since changed, with United Guaranty and other providers now allowing gifts and grants to satisfy the borrower's minimum borrower contribution requirement for borrowers who qualify. For more details, see our previous blog item on The Rising Role of Gifts and Grants.
It's also important to remember that over the life of the loan, mortgage insurance consistently beats out FHA financing. So, while borrowers have a number of options before them for purchasing a home, mortgage insurance continues to prove ideal for borrowers seeking lower costs up front and over the life of the loan.
Peter May has more than 30 years of mortgage industry experience and has been Vice President—Strategic Accounts at United Guaranty since April 2011. He's the primary relationship manager for select domestic and international banks and lending institutions as part of the Strategic Accounts Team.
The Strategic Accounts Team is dedicated to serving large-volume customers with the best customer service in the mortgage insurance (MI) industry. Team members work collaboratively with the leadership of lender customers to develop and enhance solutions to meet the needs of borrowers.
Prior to joining United Guaranty, May was a regional vice president in the MI industry for more than 15 years, and he previously worked with both Fannie Mae and MassHousing. May is active with the national Mortgage Bankers Association and the chapter in his home state of Rhode Island. He is a graduate of Providence College.
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