Easing the Burden: The Case for Reducing FHA Mortgage Insurance Costs

A blog empowering Hispanic homeownership through advocacy and policy.

By Elizabeth Nimmons
February 13, 2025

For many first-time homebuyers, mortgage insurance is a necessary but costly part of the path to homeownership. Mortgage insurance allows buyers to secure a mortgage with a lower down payment than the traditional 20%, but the added expense can make homeownership less affordable over time. This is particularly true for FHA borrowers as mortgage insurance is required and typically cannot be removed over time, unlike conventional loans. As housing in the U.S. becomes increasingly unaffordable, there are growing pushes for policy changes that can ease additional cost burdens. One such potential change that has earned NAHREP’s support is reducing the upfront mortgage insurance premium (UFMIP) on FHA loans.

The Role of Mortgage Insurance

Homebuyers using low-down-payment loan products are typically required to purchase mortgage insurance to protect the lender in case of default. While most lenders of conventional loans require borrowers to purchase mortgage insurance if their down payment is less than 20%, FHA loans require mortgage insurance regardless of down payment amount. Beyond whether or not borrowers are required to purchase mortgage insurance, there are other key differences between the private mortgage insurance (PMI) required for some conventional loans and that offered by the FHA:

• Private Mortgage Insurance (PMI): The cost of private mortgage insurance typically varies based on the financial characteristics of the homebuyer and the home they are purchasing (e.g., credit score, loan-to-value ratio, etc.) and individual lender guidelines. PMI is paid as a monthly premium, which can increase the cost of homeownership for these buyers. Importantly, PMI can often be canceled once the homeowner reaches 20% equity, meaning they would no longer incur the monthly premium expense.
• FHA Mortgage Insurance: Unlike private mortgage insurance, FHA mortgage insurance includes two components: an upfront mortgage insurance premium (MIP) that is usually paid at the time of closing and an annual mortgage insurance premium that is divided into 12 equal monthly payments. The upfront MIP totals 1.75% of the cost of the loan. For example, if a buyer purchases a $400,000 home with 4% ($16,000) down, the upfront MIP would be 1.75% of $386,000. That’s an additional $6,755 due at closing.Like private mortgage insurance, the FHA annual MIP is calculated based on factors like loan-to-value ratio and loan term. Unlike PMI however, FHA mortgage insurance typically endures for the life of the loan, rather than falling off after the homeowner reaches 20% equity.[i] So, while FHA loans are critical to first-time homebuyers because of their 3% down payment product and more flexible underwriting guidelines, the structure of the MIPs prove costly for these buyers over time.

Does Mortgage Insurance Impact the Affordability of FHA Loans?

Regardless of whether the upfront mortgage insurance premium is paid in cash or financed into the mortgage, it can greatly impact affordability for FHA homebuyers. Saving for a down payment and closing costs is already one of the most significant barriers to homeownership, so consider the additional burden the 1.75% upfront MIP creates for FHA borrowers wishing to pay it at closing. And while those buyers planning to roll this expense into their loan may not need to come up with the additional cash at closing, they are committing to increased long-term costs. In both cases, the upfront MIP has a significant impact on affordability.

The Case for Reducing the FHA Mortgage Insurance Costs

The good news is that the FHA’s Mutual Mortgage Insurance Fund (MMI Fund) is in excellent financial standing. The MMI Fund is required by Congress to maintain a minimum capital ratio of 2%, meaning the fund must keep in its reserves at least 2% of its total insured loan balance. As of September 30, 2024, the MMI Fund capital ratio stood at 11.47%, nearly six times the mandated minimum. Therefore, the agency certainly can afford to reduce costs without compromising its ability to safely insure loans. NAHREP supports the following policy changes:

• Lower the upfront mortgage insurance premium: A reduction in the upfront MIP could greatly impact affordability by lowering costs due at closing, particularly for first-time buyers, lowering a significant barrier to homeownership. Even a modest reduction in the upfront MIP could ease affordability concerns without jeopardizing the MMI Fund’s financial stability.
• Eliminate the lifetime mortgage insurance premium requirement: Once a homebuyer has reached 20% equity the risk of default is so inconsequential that ongoing annual mortgage insurance is unnecessary. Eliminating this requirement could save homeowners thousands of dollars over the life of their loan.

How Can Real Estate Professionals Help?

Real estate agents, mortgage originators, and housing advocates pay an essential role in educating first-time homebuyers about their financing options and in advocating for housing policy reforms. Industry players should:

• Stay informed: It is critical that industry professionals stay up-to-date on potential FHA changes and be sure to communicate these updates to homebuyers.
• Champion comparison: Encourage buyers to compare and carefully consider various loan options, including FHA and conventional financing and ensure they understand the implications of mortgage insurance for both.
• Advocate: Engage in advocacy efforts to support mortgage insurance reforms that improve affordability for first-time homebuyers.