How FHA Loans Work
An FHA loan is a mortgage insured by the Federal Housing Administration and issued by a regular
lender. The insurance is what lets lenders approve buyers they might otherwise turn away: down
payments as low as 3.5% and credit scores starting at 580 (500–579 with 10% down).
The price of that flexibility is mortgage insurance — an upfront premium folded into the loan and
an annual premium billed monthly, both modeled exactly in the calculator above.
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The two mortgage insurance premiums
Upfront MIP (UFMIP) is 1.75% of the base loan amount — the loan before the premium
itself is added. Almost everyone finances it, so a $482,500 base loan becomes a $490,943.75 loan
once the $8,443.75 UFMIP is rolled in. Annual MIP is charged as a yearly rate on
the base loan and paid in monthly installments. FHA recalculates it each year against the current
balance, so in practice it drifts down slowly as you pay; for budgeting, lenders and this
calculator use the starting figure, which slightly overstates later years.
Annual MIP rates (HUD, current schedule)
| Term | Base loan | LTV | Annual MIP |
|---|
| Over 15 years | $726,200 or less | 95% or less | 0.50% |
| Over 15 years | $726,200 or less | Over 95% | 0.55% |
| Over 15 years | Over $726,200 | 95% or less | 0.70% |
| Over 15 years | Over $726,200 | Over 95% | 0.75% |
| 15 years or less | $726,200 or less | 90% or less | 0.15% |
| 15 years or less | $726,200 or less | Over 90% | 0.40% |
| 15 years or less | Over $726,200 | 78% or less | 0.15% |
| 15 years or less | Over $726,200 | 78–90% | 0.40% |
| 15 years or less | Over $726,200 | Over 90% | 0.65% |
Duration follows one rule: put down 10% or more (LTV of 90% or less) and annual MIP
ends after 11 years; put down less and it runs for the life of the loan. That single rule is why
the verdict box above matters — at 3.5% down, the only exits from FHA insurance are refinancing
into a conventional loan or paying the loan off.
FHA vs conventional: the honest trade
FHA wins on access: smaller down payments, friendlier credit standards, and debt-to-income
allowances up to 43% on the back end (31% housing ratio) — higher still with compensating factors
like cash reserves or a history of handling similar payments. Conventional loans win on insurance:
PMI can be cheaper than MIP for strong credit profiles and, crucially, it
cancels at 80% LTV instead of lasting for life. The comparison in the results puts
a dollar figure on that difference for your exact loan, which is the number that should drive the
choice — not the headline rate. Buyers with military service should also price a
VA loan, which has
no monthly insurance at all, and everyone should confirm the overall payment fits with the
house affordability calculator.
Prepayments and the 203(k)
FHA loans carry no prepayment penalty, so the extra-payment fields above are
penalty-free levers: even modest monthly extras cut years of interest, and because they shrink the
balance faster, they also pull forward the day a refinance out of MIP becomes possible. If the
home needs work, the related FHA 203(k) program rolls renovation costs into the
same loan (a streamlined version covers smaller projects) — funds sit in escrow and are released
as the work is completed, generally within six months.
FAQ
How much is FHA mortgage insurance?
Upfront: 1.75% of the base loan, usually financed. Annual: most commonly 0.55% of the base loan per year at minimum down payment on a 30-year term, paid monthly.
Can FHA MIP be cancelled?
Automatically only when you put down at least 10% — then it ends after 11 years. Below 10% down it lasts for the life of the loan; refinancing into a conventional loan is the usual exit.
What credit score do I need?
580+ for 3.5% down; 500–579 needs 10% down. Individual lenders may require more, and the home must meet FHA property standards.
Disclaimer: This calculator provides estimates for educational purposes only and does not constitute financial
advice. MIP rates shown follow HUD Mortgagee Letter 2023-05; FHA loan limits, lender overlays and your actual
premiums vary by county, lender and credit profile.