Reader question: “I am confused about the private mortgage insurance that is (or maybe isn’t?) attached to FHA loans. I’ve read that these loans require PMI, and I’ve also read that they don’t. There seems to be a lot of conflicting information on this subject. I’m hoping you can be the definitive voice to clarify this for me. Does FHA require PMI / mortgage insurance for all borrowers who use the program?”
I think it’s the terminology that’s confusing you. Yes, the FHA requires borrowers to pay a mortgage insurance premium (two of them actually). But it is not called “PMI” because the policy comes from the government – not from the private sector.
FHA Does Not Require PMI
The FHA does not require PMI, because the ‘P’ stands for private. This type of insurance policy is used for conventional home loans (that are not insured by the federal government). PMI policies are arranged by the mortgage lender and provided by private-sector insurance companies.
With that being said, FHA does require a mortgage insurance premium to be paid by the borrower. Actually, they require two different premiums – but they’re not called PMI. Remember: P = private.
But They Do Require Mortgage Insurance
- an upfront mortgage insurance premium (MIP) that’s 1.75% of the base loan amount, and
- an annual MIP that’s usually * 0.7% for a 15-year loan, or 0.85% for a 30-year loan.