How Do We Get Rid of the FHA Mortgage Insurance Premium?

Question: I bought a home with FHA financing. We have a monthly insurance premium (MIP) with each payment. How do we get rid of this cost?

Answer: When you bought your home you purchased with little money up front, perhaps 3.5 percent down. This means a lender put up as much as 96.5 percent of the purchase price. This is a high-risk situation for lenders because they greatly prefer 20 percent down.

With FHA, what you have is not a loan from the government but a form of insurance for the lender. You can borrow with little down, but you have to pay for the insurance coverage — the MIP.

There are two ways to end FHA MIP payments. You could refinance with a new loan — this would end the MIP payment but only makes sense if you have at least 20 percent equity so that the new loan does not require either the FHA MIP cost or private mortgage insurance (MI).

Or, you can reduce the loan balance to 78 percent of the original principal amount.

Specifically, here’s what HUD has to say:

Generally, loans closed prior to January 1, 2001 will not be eligible for termination of MIP, which is collected as part of your monthly mortgage payment.

For loans closed on or after January 1, 2001, FHA’s MIP will be automatically terminated under the following conditions:

1. For mortgages with terms more than 15 years, the MIP will be terminated when the Loan to Value (LTV) ratio reaches 78%, provided the borrower has paid the MIP for at least five years. If the LTV reaches 78% and the borrower has not paid MIP for at least five years then the borrower must continue to pay MIP until the five year requirement is met.

2. For mortgages with terms 15 years and less and with LTV ratios of 90.01% and greater, the MIP will be terminated when the LTV ratio reaches 78%, irrespective of the length of time the borrower has paid the MIP.

3. Mortgages with terms 15 years and less and with LTV ratios of 90.00% and less will not be charged MIP.

For loans closed and insured under the Hope for Homeowners Program, the annual MIP is collected monthly for the life of the loan.

Note: The MIP cancellation provision excludes those loans not insured by the Mutual Mortgage Insurance (MMI) fund. Although the MIP will be terminated as described, the FHA insurance will remain in force for the loan’s full term. This MIP termination provision only applies to loans where the borrower also paid an Up-front MIP at closing. FHA will determine when a borrower has reached the 78% LTV ratio based on the lesser of the sales price or appraised value at loan origination. For example, if the lesser of the sales price or the appraised value at origination was $100,000, when the loan amount reaches $78,000, HUD will no longer collect MIP on the loan.

FHA’s regulations do not permit a borrower to submit a new appraisal to reach the threshold for termination of MIP. Termination of MIP will normally be based on the scheduled amortization of the loan. However, borrowers may reach the 78% threshold in advance of the scheduled amortization because of prepayments of loan principal.

A borrower whose loan reaches the 78% LTV threshold sooner than projected because of prepayment may have the MIP terminated (but not sooner than five years from loan closing for loans with terms greater than 15 years) if the borrower has not been more than 30 days delinquent in paying the mortgage payments during the previous 12 months.

The borrower must submit a termination request to the lender and the lender must provide the borrower’s request and supporting documentation with respect to the mortgage payments during the last 12 months to FHA for such termination.

If you have questions regarding the termination of MIP, go to the following HUD website: http://www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm

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