FHA loans are mortgages insured by the Federal Housing Administration (FHA). They are designed for low-to-moderate income borrowers who may have lower credit scores.
The formulas used to calculate the FHA loan details are:
down payment=home price×down payment percentage loan amount=home price−down payment UFMIP=loan amount×1.75% Annual MIP=loan amount×0.85% Monthly MIP=Annual MIP12
Mr. Beans is trying to secure an FHA loan financing for a home worth $200,000. He has a credit score of 520, which does not qualify him for the 3.5% down payment. However, he has evaluated different loan offers and found that the 10% down payment is a better deal than that offered by a conventional loan. Let's calculate how much he would need to pay through a loan term of 30 years at 3% interest per annum.
First, he will have to check the qualification that the $200,000 is within the FHA loan limits for the county he wants to make the purchase.
Calculate the down payment and FHA loan amount:
down payment=10%×$200,000=$20,000 loan amount=$200,000−$20,000=$180,000
Calculate the Upfront MIP (UFMIP):
UFMIP=1.75%×$180,000=$3,150
Calculate the annual MIP and compute the monthly premiums:
Annual MIP=0.85%×$180,000=$1,530 Monthly MIP=$1,53012=$127.50
Mr. Beans will have to pay $127.50 monthly MIP in addition to the $3,150 one-time UFMIP on a $180,000 FHA home loan. But making a 10% down payment now means he would only have to pay premiums for the first 11 years of the loan term.