An FHA UFMIP (Federal Housing Administration upfront mortgage insurance premium) is needed to close an FHA-insured loan. All FHA loans must be insured to protect lenders against default. The upfront mortgage premium is a part of that process.

What It Means

When you are approved for an FHA loan you agree to pay insurance premiums to guarantee the loan. A portion of the premiums are "collected up front" and are included in the mortgage amount. In 2010, the UFMIP fee was 2.25 percent of the loan amount.

Costs Included In Mortgage

The term "up front" can be misleading. Buyers are not required to pay a lump sum at closing to cover the UFMIP. Instead, the total amount is rolled into the mortgage and is paid as the homeowner makes monthly payments.

An Example

A buyer purchasing a home priced at $200,000 would have to pay $4,500 for UFMIP---2.25 percent of the gross loan amount. That would increase the amount of the mortgage to $204,500, not including the down payment.

Tightened Standards

Entering 2010, the cost of UFMIP was only 1.75 percent of the gross loan amount. The FHA elected to raise the UFMIP because of the increasing number of foreclosures brought on by the housing crisis and slumping economy.

Building Reserves

Because of foreclosures, FHA had seen its insurance reserves sink below the minimum level required by Congress. Raising the price of UFMIP was necessary to rebuild those reserves, according to the FHA. The FHA insures about 30 percent of new loans, and the agency is the largest backer of mortgages for first-time buyers.

Source:

Trulia.com: Federal Housing Administration raise UFMIP fees to 2.25% From 1.75%.