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:
\[ \text{down payment} = \text{home price} \times \text{down payment percentage} \] \[ \text{loan amount} = \text{home price} - \text{down payment} \] \[ \text{UFMIP} = \text{loan amount} \times 1.75\% \] \[ \text{Annual MIP} = \text{loan amount} \times 0.85\% \] \[ \text{Monthly MIP} = \frac{\text{Annual MIP}}{12} \]
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:
\[ \text{down payment} = 10\% \times \$200,000 = \$20,000 \] \[ \text{loan amount} = \$200,000 - \$20,000 = \$180,000 \]
Calculate the Upfront MIP (UFMIP):
\[ \text{UFMIP} = 1.75\% \times \$180,000 = \$3,150 \]
Calculate the annual MIP and compute the monthly premiums:
\[ \text{Annual MIP} = 0.85\% \times \$180,000 = \$1,530 \] \[ \text{Monthly MIP} = \frac{\$1,530}{12} = \$127.50 \]
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.