The 203K loan is an FHA program, which means that all of the FHA guidelines pertain to this program. What this means is that you will have to pay mortgage insurance on your rehab loan, whether you choose the full or streamlined version of the 203K loan. The tradeoff for paying the mortgage insurance, however, is the ability to obtain a flexible loan with easy guidelines and the ability to fix up your current or future home without touching money from your own bank account – the money comes from the proceeds of this FHA-backed loan.
The Types of Mortgage Insurance
There are two types of mortgage insurance you will pay with the FHA 203K loan. The first type is the upfront mortgage insurance. This money is charged on every FHA loan and gets paid at the closing of the new loan. As of today, that amount is 1.75 percent of the loan amount. So, for example, if your new loan amount is $200,000, you will pay $3,500 upfront to get the loan. This money is then put into a reserve account that the FHA holds and is used to fund the guarantees the FHA has to make good on with lenders when borrowers default. The upfront MIP recently changed in January of 2015, decreasing as a result of the overabundance of reserves the FHA had on hand, which technically means there were fewer defaults that they had to pay lenders for as a result of the economy turning itself around.
The other type of mortgage insurance you will pay on the FHA 203K loan is the annual mortgage insurance premium. This insurance is not paid up front, but is paid on an annual basis, typically divided up amongst your 12 payments throughout the year. Right now, the percentage charged for annual MIP is 0.85% of the outstanding loan amount, calculated on an annual basis. Your annual MIP might slightly decrease as you pay down your principal balance. In order to determine the amount of your annual MIP, use the following calculation:
- Take your outstanding principal balance x 0.85% ($200,000 x .085% = $1700)
- Take the annual MIP amount/12 months ($1700/12 = $141.67)
- $141.67 is the amount of MIP added to your monthly mortgage payment
Eliminating Mortgage Insurance
It is common knowledge that with a conventional loan, you can eliminate PMI once you reach below an 80 percent loan-to-value ratio. With the FHA loan, however, you cannot eliminate mortgage insurance premium, even if your LTV drops below 80 percent. The only way out of this insurance payment is to refinance out of the FHA program. This can be beneficial for you if you made significant changes to the home and the value has dramatically increased. If this is the case, you will likely hit 80 percent of the value of your home quicker than you would with any other program, making it easier to refinance into a conventional loan at a later date while still having the funds to get the work done on your home.
The fact that you will have to pay mortgage insurance on your 203K loan whether you choose the streamline or full version, should not deter you from taking advantage of this great loan program. It is one of the only programs that allows you to include the cost of repairs and remodeling into the loan without having to take out a 2nd lien and taking equity out of the current value of the home. The process to qualify for the 203K loan is very simple and with the right help of a professional loan consultant, you will likely have an easy time getting through the entire process of not only obtaining the loan, but making changes to it as well.