When purchasing a home, lenders will require home buyers to purchase Private Mortgage Insurance on FHA loans because their down payment is less than 20% of the value of their new home. This insurance allows borrowers with less cash to purchase a home with smaller down payments, and it also protects lenders if a borrower were to default on a loan. Borrowers will pay a monthly fee for their Private Mortgage Insurance in addition to each month’s mortgage payment.
There are two ways to pay for the Private Mortgage Insurance Premium (MIP): (1) out of pocket, or (2) financed by the lender. When the borrower is presented with the estimated settlement statement at the close of escrow, the MIP premium is always reflected in a line item as a debit (“charge”) to the buyer, regardless if it has been financed by the lender or not. This is to ensure that the proper amounts of the financed funds are allocated correctly toward the purchase price and the MIP premium. See examples below:
1. Estimate Closing Cost with MIP paid out-of pocket:
2. Estimated Closing Costs with MIP financed by lender:
It is important to remember that the MIP premium will always be reflected as a line item “debit” even if it is being financed by the lender. The “Funds required” line item will reflect the actual amount needed from the buyer prior to the close of escrow.