Up-Front Mortgage Insurance (UFMI)

Up-front mortgage insurance is an insurance premium that is collected, typically on Federal Housing Administration (FHA) loans, at the time the loan is initially made. It is in contrast to private mortgage insurance (PMI), which is collected by the lender each month when a buyer's down payment is less than 20 percent of the purchase price. Up-front mortgage premiums are added to a pool of money that is used to help entities, such as the FHA, insure loans for certain borrowers.

Many people do not realize that premiums for up-front mortgage insurance can usually be refunded on a pro-rated basis, if a home is sold within the first five to seven years of ownership. In other words, if someone has paid this premium up front and then sold their home within a few years of their original purchase, they may be entitled to a substantial refund even years after the fact.

If a homeowner received their FHA loan before June 2013, they are eligible for a refund and cancelation of their up-front mortgage insurance premium after five years. A homeowner must have 22 percent equity in the property, and all payments must have been made on time. Homeowners with FHA loans issued after June 2013 must refinance into a conventional loan and have a current loan-to-value of at 80 percent or more.

Up-front mortgage insurance premium payments are submitted directly to HUD and collected by the U.S. Department of the Treasury's automated collection service. HUD uses a secure Internet collection portal to process collections electronically. This automated collection service:

• Satisfies agency and business partner demands for electronic alternatives by providing the ability to complete forms, make payments, and submit queries electronically via the Internet.
• Enables business partners and consumer users to access their payment accounts from any computer with Internet access.li>
• Enables federal agencies to obtain and process collections in an efficient and timely manner

There are a couple ways home buyers can avoid paying upfront mortgage insurance:

1. Apply for a conventional mortgage loan. Mortgage lenders will not require upfront mortgage insurance for conventional loans that have an 80 percent loan to value or less. This threshold applies to both purchase and refinance transactions.

2. Make a 20 percent down payment to avoid paying upfront mortgage insurance. A mortgage lender will not shoulder as much risk when a down payment for a home is equal to 20 percent or more; therefore, a homebuyer is not expected to pay for mortgage insurance.

3. Get a second mortgage. A 5 percent down payment would require a 15 percent second mortgage, as a 10 percent down payment would require a 10 percent second mortgage, to account for the 20 percent that is needed to avoid mortgage insurance.

4. Get help from the seller. A seller who has equity may opt to finance a portion of the purchase price, via a second mortgage. Your 10 percent down payment that is coupled with the seller’s 10 percent second mortgage will help you avoid mortgage insurance.