FHA mortgage insurance, known as MIP (Mortgage Insurance Protection) is an insurance policy that protects the lender if you default on the mortgage. MIP allows the lender to issue mortgage loans that require small down payments and at very low interest rates. MIP reduces risk to the lender, and this allows the lender to issue mortgage to people who might not otherwise qualify for a loan.
The FHA mortgage holder pays for the MIP up front and as part of their monthly mortgage payment. After mid-2013, most FHA mortgage loans are required to pay MIP for as long as they hold their mortgage with FHA. By making people pay for mortgage insurance premium even after they have 20% equity, the Federal Housing Administration has been able to bolster its reserves to ensure it has enough money available in case people were to default en mass. But there are ways that you still can get rid of mortgage insurance. Below is more information about FHA mortgage insurance premium and how you may be able to cancel MIP. Ask about no PMI loan opportunities.
How Long Does MIP Last with FHA Mortgage Programs?
Loans from FHA are in two categories: those that have case numbers before June 3, 2013, and those that have case numbers after that date. Being able to cancel MIP or not depends upon the date the loan was issued and other factors. For FHA loans that were issued on or after June 3, 2013:
- 20-30 year loan with less than 10% down: MIP is life of the loan
- 20-30 year loan with more than 10% down: MIP can be cancelled after 11 years
- 15 years or less loan with less than 10% down: MIP is life of the loan
- 15 years or less with more than 10% down: MIP can be cancelled after 11 years
For loans that were issued before June 3, 2013:
- 20-30 year loan with less than 10% down: 78% LTV, MIP can be cancelled
- 20-30 year loan with 10-22% down: 78% LTV, MIP can be cancelled
- 15 year loan with less than 10% down: MIP may be cancelled after five years
- 15-year loan with 10-22% down: With 78% LTV, MIP can be cancelled
Most FHA lien holders have loans that were opened after June 2013, had less than 10% down and were for 30 years. In these cases, you cannot cancel MIP. But that is not the end of it. Once you have gotten to 80% or so LTV, that is, you have at least 20% equity, you can refinance out of an FHA loan into a conventional loan with no mortgage insurance.
The price of homes has gone up considerably in the last three years. A home that you put down only 3.5% or so in 2014 could have enough equity to allow you to refinance with no PMI.
Why People Choose FHA Loans and MIP
A major advantage of conventional mortgages is mortgage insurance is cancelled automatically when you reach 78% loan to value. As we have made clear above, this is not usually the case with FHA mortgage insurance. So why do so many people choose an FHA loan with MIP?
FHA loans are easier to qualify for. It is possible to have a 3.5% down payment with only a 580 FICO score. If you get a conventional loan, you may have to have at least a 640 FICO score and put more money down. It also is possible to get an FHA loan with only a 500 FICO score. FHA loans are popular with people who had serious financial problems in the past, such as a bankruptcy or foreclosure. But as long as you are on a stable financial footing in the last one or two years, you should be able in many cases to get an FHA loan. The FHA loan is one of the most popular loan products in America today for people with below average credit scores.
Also, FHA MIP is significantly cheaper than conventional PMI for people who have credit scores below 700. For example, FHA MIP costs $71 per $100,000 borrowed regardless of your credit score. But with a 680 FICO, conventional PMI costs $44 more per $100,000 financed. Thus, mortgage insurance is a better deal for people with lower credit scores on an FHA loan.
Refinancing Out of an FHA Program
Still, if you have 20% equity in the property, there is no reason you should pay MIP forever with an FHA mortgage. It is strongly recommended when you have 20% equity to refinance to a conventional mortgage. You should find a lender who specializes in these types of refinances.
Paying for MIP with an FHA loan is not a cheap thing, but it is often a good deal until you have 20% equity in the property. After you have that much equity, you are strongly advised to have your credit score at a point where you can refinance into a conventional loan. There is no reason to pay for MIP for the entire life of the loan.