FHA Mortgage Insurance is a required payment for all FHA borrowers. The money you pay towards your mortgage insurance helps the FHA stay funded. Without the funding, the FHA would be unable to afford to guarantee as many loans as they do each year. The FHA charges the mortgage insurance in two ways: upfront mortgage insurance which you pay at the closing and annual mortgage insurance which you do not pay in one lump sum, but rather over the 12 month period of each year.
The Definition of FHA MIP
First, it is important to understand that the FHA is not a lender. They do not write or fund the loans. They are a mortgage insurer, which means they provide insurance to the lenders that do fund the loans. The FHA only provides this insurance if the lender makes sure that the loans meet the FHA guidelines. These guidelines help to minimize the risk of default by ensuring that the lender checks the debt-to-income ratio, credit history, asset verification for large down payments and that the property met the specific FHA standards. This way the FHA has to bail out fewer banks, leaving more reserves in their account to continue offering FHA loans to others at affordable rates.
The FHA works in much the same way as your auto or medical insurance carrier. They collect premiums which help them have the reserves necessary to pay lenders that have loans that default. You pay the upfront mortgage insurance premium at the closing out of your own funds, if you wish, or you can roll it into your loan amount without affecting the loan-to-value ratio. The lender adds the annual mortgage insurance premium to your monthly mortgage payments in 1/12th installments of the full amount for the year.
FHA MIP Guidelines
The FHA MIP guidelines show which programs must pay mortgage insurance and for how long. Contrary to popular belief, not every homeowner pays mortgage insurance for the life of the loan. The breakdown is as follows:
All mortgages with a term greater than 15 years following the below breakdown:
- – All loans, regardless of the LTV or term pay an upfront mortgage insurance premium equal to 1.75% of the loan amount
- – Any mortgage with an LTV less than 90% at the time of the closing pays annual mortgage insurance for the first 11 years of the loan only and the rate is 0.80% of the loan amount
- – Any mortgage with an LTV between 90 and 95% at the time of the closing pays annual mortgage insurance for the life of the loan at a rate of 0.80%
- – Any mortgage with an LTV greater than 95% at the time of the closing pays annual mortgage insurance for the life of the loan at a rate of 0.85%
- – Any mortgage with a loan amount higher than $625,500 and an LTV lower than 90%, pays mortgage insurance for the first 11 years of the loan at a rate of 1.0%
- – Any mortgage with a loan amount higher than $625,500 and an LTV between 90 and 95% pays annual mortgage insurance for the life of the loan at a rate of 1.0%
- – Any mortgage with a loan amount higher than $625,500 and an LTV greater than 95% pays annual mortgage insurance for the life of the loan at a rate of 1.05%
If you take out a mortgage with a term equal or less to 15 years, you are subject to different FHA MIP Guidelines:
- Any mortgage with an LTV less than or equal to 90% at the time of closing pays annual mortgage insurance for the first 11 years at a rate of 0.45%
- Any mortgage with an LTV greater than 90% at the time of closing pays annual mortgage insurance for the life of the loan at a rate of 0.70%
- Any mortgage with a loan amount higher than $625,500 and an LTV less than or equal to 78% pays annual mortgage insurance for the first 11 years at a rate of 0.45%
- Any mortgage with a loan amount higher than $625,500 and an LTV between 78 and 90% pays annual mortgage insurance for the first 11 years at a rate of 0.70%
- Any mortgage with a loan amount higher than $625,500 and an LTV greater than 90% pays annual mortgage insurance for the life of the loan at a rate of 0.95%
FHA MIP is Mandatory
If there is one thing you take away from learning about FHA MIP it is the fact that it is mandatory. Whichever category you fall into above, you must pay the mortgage insurance premiums as stated for the specified time. A majority of borrowers fall into the lifelong mortgage insurance premiums. There are no exceptions to this rule like there are for conventional loans that have Private Mortgage Insurance. You are not able to request that the FHA cancels the insurance – you must pay it for the life of the loan regardless of your current LTV as you pay your loan down.
The only way to get out of FHA MIP is to refinance the loan into a non-FHA loan. Some people use FHA loans to help them become homeowners, but then several years down the road as their financial position and credit improve, they refinance into a conventional loan. This is a perfectly acceptable way to eliminate MIP from your monthly payments. If you refinance into another FHA loan, you will apply the MIP all over again, including the upfront mortgage insurance that you already paid on your current loan. The good news is, however, if you use the FHA Streamline Program to lower your interest rate, you may be eligible to receive an FHA MIP Refund, which we will talk about below.
How to Pay Upfront MIP
You can pay upfront MIP a few different ways. The lender has to pay the premium within 10 days of funding your loan, but the lender can provide you with options to get your premium paid. The most common way is to pay it in cash at the closing, much like you pay the down payment. It is crucial to understand that the down payment and upfront MIP are two separate fees. The down payment goes towards the money the seller receives. The MIP goes to the FHA.
If you have a credit score higher than 580, you may be able to roll the upfront mortgage insurance premium into your loan. This amount does not affect your LTV, so you are still able to borrow the full 97.5% that FHA loans allow if you only put down 3.5%.
How to Pay Annual MIP
Annual mortgage insurance is not paid at the start of the loan. Instead, this lender adds the fee to your monthly mortgage payments. The amount adjusts slightly based on the average outstanding principal balance for the year. You can see this amount on your amortization table that you receive at the closing. The FHA bills the lender once per year for the annual premium, but just like an escrow account works, the lender collects 1/12th of the amount from you each month and pays the FHA once per year after they collect the entire years’ worth of premiums.
FHA MIP Grandfather Policies
If you obtained your original FHA loan before June 1, 2009, you can take advantage of the FHA MIP Grandfather policy. This means that you do not have to pay the increased rates that are current today. Borrowers with an FHA loan that began before June 1, 2009, paid significantly lower MIP rates and can continue to do so with both an FHA Streamline Refinance and a credit qualifying FHA loan (cash-out refinance).
If you fall into this category, your MIP rates are as follows:
- 0.01% for upfront MIP
- 0.55% annual MIP for 30-year loans with any LTV and 15-year loans with an LTV greater than 78%
- There is no annual MIP for 15-year fixed rate FHA loans that have an LTV lower than 78%
FHA MIP History
FHA mortgage insurance rates change often as they are a direct result of the money the FHA requires in their reserves. When the market is good and default rates are low, the reserve builds up and the FHA is able to lower mortgage insurance rates. When things are not good, such as during the housing crisis, rates have to increase in order to cover the default rate the FHA has to pay out. Following is a history of the FHA annual MIP rates:
- Before January 2008 annual MIP was 0.50%
- October 2008 the annual MIP increased to 0.55%
- October 2010 the annual MIP increased to 0.90%
- April 2011 the annual MIP increased to 1.15%
- April 2012 the annual MIP increased to 1.25%
- April 2013 the annual MIP increased to 1.35%
- January 2015 the annual MIP decreased to 0.85%
FHA MIP on Standard Purchases
Any type of FHA loan you take out requires mortgage insurance. Standard purchases are the most common use for FHA loans and use the above amounts for both upfront and annual mortgage insurance premiums. As stated above, you can usually roll the upfront MIP into your loan, even with a purchase, making the amount you must bring to closing slightly lower.
The good news with FHA loans is that you do not need a large down payment. With just 3.5% of the sales price down, you can secure an FHA loan. This makes it easier for some people to pay the upfront mortgage insurance out of their own pocket, rather than rolling it into the loan. If you do add it to your loan amount, consider the amount of interest you will pay on the amount, therefore, increasing the final amount of mortgage insurance you pay. If you can afford to pay the insurance up front, it is best to do it that way.
FHA MIP on 203K Loans
The FHA 203K loan offers you the chance to not only purchase or refinance a home, but also to fix it up with the funds from the loan. You must use a contractor to complete the changes/repairs and you must work with the lender to ensure that all repairs/changes are acceptable and completed on time. Despite the difference with the FHA 203K loan, providing you with extra funds to fix up your home, the MIP rates are the same:
- Upfront MIP = 1.75% of the loan amount
- Annual MIP = 0.85% of the principal balance
FHA MIP on Streamline Refinances
The FHA Streamline Refinance enables you to refinance your current FHA loan into a lower rate. In some cases, it also allows you to refinance from an adjustable rate loan into a fixed rate loan. In order to use this program, you have to show the lender/FHA some type of benefit that you receive with the refinance. For example, if you lower your payment by 5%, you have a benefit to refinance. The reason the FHA requires a benefit is because they do not require very much paperwork to qualify you for the loan. You do not need:
- Income verification
- Employment verification
- Credit scores
- A new appraisal
Basically, the lender uses the information from your original FHA loan to qualify you for the loan. The only exception to the rule is that you need to have a good mortgage history in order to qualify. If you have more than one late payment (30-days late) in the last 12 months, you will not qualify for the loan.
The FHA MIP on Streamline Refinances is the same as the above MIP rates. There is, however, one exception that we will talk about below that could help you save money on your refinance.
FHA MIP Refunds
FHA MIP refunds are only available on FHA Streamline Refinances and only for the first 3 years following the origination of your current FHA loan. If you decide to refinance to lower your interest rate, you could receive a refund of the upfront MIP you paid on the original FHA loan. The amount you receive depends on how long you have had the current FHA loan. The rules state that you are not eligible for the refund until you make 6 payments on your current FHA loan. The refund starts at 70% and goes down to 10% on the 36th month. The money you receive as a refund goes towards the new upfront MIP you must pay. This makes refinancing with the FHA Streamline Refinance a little more affordable since you do not have to come up with as much money for the MIP.
FHA Mortgage Insurance on Reverse Mortgages
If you decide to take advantage of the equity you have in your home during your senior years to help you live comfortably, you will pay FHA mortgage insurance on the reverse mortgage. These amounts differ from the insurance premiums you would pay on any other type of FHA loan and are as follows:
- If you take less than 60% of the principal amount awarded to you at the closing or during the 1st 12 months of the loan, you pay 0.5% of the principal amount in upfront mortgage insurance
- If you take more than 60% of the principal amount awarded to you at the closing or during the 1st 12 months of the loan, you pay 2.5% of the principal amount in an upfront mortgage insurance fee
No matter how you take the disbursements, every reverse mortgage borrower also pays 1.25% in annual mortgage insurance. This helps to guarantee that you receive the funds you are meant to receive from your reverse mortgage.
Is FHA MIP Tax Deductible?
The good news is that in some cases, FHA MIP is tax deductible. Of course, you need to go over your exact situation with your tax preparer to determine if you are eligible to receive a deduction for this fee. There are certain restrictions that apply, such as you need to itemize your tax deductions and you cannot exceed the maximum income allotment of $100,000 for married couples or $50,000 for singles.
The FHA MIP is there to help the FHA continue to provide loans for borrowers that are in the low to middle-of-the-road income range. The FHA program is not just for first-time homebuyers, either. It is for anyone that needs a little help in qualifying for a loan that might not be eligible for a conventional loan. The MIP helps the FHA provide these loans. It does not have to be something you pay forever; if you better your situation and qualify for conventional financing, you can always refinance down the road to make home ownership less costly for you in the long run