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FHA Mortgage Insurance

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Highlights

  • The FHA program enables borrowers with low down payments to buy a home.
  • In order to cover the risk of default, a monthly insurance premium (MIP) is added to the mortgage payment.
4.5
/5.0
(7 Votes)

The FHA Mortgage Insurance Premium Program at a Glance

Editor’s note: FHA Mortgage Insurance Premium Changes starting April 9, 2012 and June 11, 2012. There is good news and bad news regarding the FHA MIP (Mortgage Insurance Premium) rates depending on the type of loan you are taking:

  1. Streamline Refinance Loan: The good news is that the mortgage insurance for FHA Streamline Refinance loans is decreasing starting June 11, 2012. The UFMIP (UFMIP) rate decreases to 0.01%, instead of 1%. The annual MIP will be set at 55 bps instead of 115 bps, regardless of the loan amount. That means a savings of $50 per month for every $100,000. To qualify for the lower UFMIP, your current FHA loan must have been delivered to the FHA before June 1, 2009.
  2. Single Family Mortgage Loan: The bad news affects new FHA  home purchase loans and borrowers refinancing a non-FHA loan, is that the rates, starting April 9 2012 are increasing. The UFMIP increases to 1.75% instead of 1%. The annual MIP will increase by 10 bps. (That means an additional $8.33 per month for every $100,000). The increase in the rates was a result of the Temporary Payroll Tax Cut Continuation Act of 2011 signed by President Obama on Dec. 23, 2011.

Quick tip

You can apply for an FHA loan with one of Bills.com’s pre-screened FHA loan providers.

The FHA Mortgage Insurance Premium

FHA mortgage insurance is similar to the private mortgage insurance (PMI) required for conventional mortgages with down payments below 20%, but there are some key differences.

Up-Front Fees

Unlike the traditional PMI, the FHA MIP includes a 1.5% up-front fee at time of closing. The fee is usually included in the loan, so you pay it over the life of the loan. (See the editor’s note above for news about a change to this fee.)

Rate

The FHA MIP is also mandated at annual premium of 1.1% to 1.15% of the loan amount per year, divided over 12 months for fixed-rate loans. (Variable-term MIP rates are is 0.25% or 0.50% per month for 15-year or shorter-term loans.) PMI rates are usually .5% divided over 12 months, but the rates do vary by lender. (See the editor’s note above for news about a change to this fee.)

Removal

Unlike PMI, the FHA MIP is mandatory for the first five years of loans with terms of more than 15 years, even if your loan balance reaches 78% of the original home value or sales price. PMI premiums can often be removed if the loan balance is below 80% of the current market value. Conventional lenders are required to automatically remove PMI when the loan balance falls to 78% of the original loan amount.

Exceptions

There are some exceptions to the mandated FHA mortgage insurance premium. If you have a loan term of 15 years or less AND put down 10% or more, the MIP will be canceled when the loan balance is 78% of the original appraised value or original sales price, whichever is less. If you pay 20% down on a 15-year loan, you won’t be required to pay the MIP.

How the MIP Affects Your Loan Decision

Most people want to avoid paying mortgage insurance because it adds no value to the home and does not go towards the principal. If you do not have a 20% down payment, then you will most likely have to pay it for any loan, whether it is from the FHA or a conventional lender. In that case, carefully compare the costs of each loan.

If you have saved a 20% down payment and have a good credit history, then a conventional mortgage is probably better for you because you will not have to pay PMI on a 30-year mortgage, as you would with an FHA loan. However, if your down payment is a family loan or gift, you may not qualify for a conventional loan even with 20% down. In that case, an FHA loan with MIP may be your only option. If you can afford the higher payments for a 15-year mortgage, that may be the best option.

MIP and Other Baffling FHA Mortgage Insurance Acronyms

MIP is the least confusing of the FHA’s list of insurance-related acronyms, which includes CHUMS, SFIOD, and SFPCS-P. Fortunately, the FHA offers a decoder page: Terminology Used with Single Family Upfront Mortgage Insurance Premium.

FHA Mortgage Insurance Refunds

The FHA and HUD owe mortgage insurance premium refunds to some homeowner who received a loan between September 1, 1983 and January 1, 2001 due to excess earnings from the FHA’s Mutual Mortgage Insurance Fund. If you believe you qualify for a refund, you can visit the HUD refund page to verify eligibility. Do not hire someone else to trace your refund for you.

You may be eligible for a premium refund if you:

  • Acquired an FHA loan after September 1, 1983
  • Paid an up-front mortgage premium at closing
  • Did not default on your mortgage

You may be eligible for a share of the excess earnings if you:

  • Acquired your loan before September 1, 1983
  • Have paid your loan for more than seven years
  • Had your FHA MIP terminated before November 5, 1990

There are also exceptions for loan assumptions, FHA to FHA refinances, insurance claims by a mortgage company, and the statute of limitations.

In most cases, you would have been notified of the refund when HUD received notification that the FHA MIP on your loan was terminated. You would then be sent a check or an application. If you receive an application, read it carefully, compete it, have it notarized, and return it to HUD with the required proof of ownership.

HUD Contact Information
Contact HUD by Phone Contact HUD by Mail
(800) 697-6967
8:30 a.m. to 8:30 p.m. EST
Monday through Friday
U.S. Dept. of Housing and Urban Development
P.O. Box 23699
Washington, DC 20026-3699
All inquiries should include your name, your FHA case number, the date that the mortgage was paid-in-full, the property address, and your daytime phone number.

If you did not receive a notice within 45 days of paying off your loan, confirm with your lender that they sent notification of MIP termination to HUD. If they did, contact HUD. If you have already applied and did not receive a response within 120 days, contact HUD. You can reach HUD by phone or by mail.

Mortgage insurance is considered a burden, but if it is the only thing standing between you and home ownership, it is a burden worth bearing.

4.5
/5.0
(7 Votes)

45 Comments

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  • JM
    Feb, 2013
    Jeff
    I purchased a home for $562,000 in 2010 with a FHA loan. I refinaced in 2012 with FHA streamline 30 years fixed at 3.75%. The MIP is $464/month. I owe $505,000. Will it be benefical for me to pay down the loan to get rid of the MIP? Can I get rid of the MIP? Is the MIP mandatory for 5 years? Will I have to pay MIP for the life of the loan? Does the loan balance have to be 78% or 80% of the original sale price or of the original or current appraised value?
    0 Votes

    • BA
      Feb, 2013
      Bill
      Based on current FHA rules a 30-year loan has mandatory MIP payments for 5 years. It can be cancelled when it reaches the 78% level, based on the appraised value of the property at the time of the streamline refinance. If you can bring the LTV down to 80%, based on today's market, you can refinance into a conventional loan without mortgage insurance.
      0 Votes

  • JF
    Feb, 2013
    John
    I heard that FHA mortgage rates are increasing and are going to remain in place for the life of the loan. Does this apply to the FHA loan I took out late last year?
    0 Votes

    • BA
      Feb, 2013
      Bill
      Three-part answer to your question:
      1. Do you have an adjustable-rate mortgage? If yes, your rates will change in the future, and almost certainly upwards. Any rate change will be due to market changes that impact the index your loan follows.
      2. Do you have a fixed-rate mortgage? If yes, then the interest rate on your loan will not change unless you and the investor agree to a change voluntarily.
      3. Do you have MIP? The MIP rate (fee) may change for new loans, but not for existing loans. Also, the FHA told Congress it will require MIP for the life of loans funded at some point in 2013.

      The change to lifetime MIP for new FHA-backed loans will not be retroactive, based on what little the FHA has stated about this change.

      0 Votes

  • BS
    Mar, 2012
    Bret
    Actually, the Editor is incorrect in his explanation of Obama's new rule. The scenario he described in only for current FHA mortgage holders who wish to streamline their loan into a lower rate. On top of that, it is only for loans that were originated before May of 2009. Any new FHA loan, or any FHA loan orginated after that date, is subject to a new, higher premium. The new Upfront Mortgage Insurance is increasing from 1% to 1.75%, and the new monthly MI is going from 1.15% to 1.25%. So, more smoke and mirrors from the President and his crew, wanting us to believe that something is being accomplished, when in fact, he just made it worse.
    4 Votes

    • BA
      Mar, 2012
      Bill
      Thank you for your comment. We need to make it clearer the lower fees are for FHA refinances. The higher fees you mentioned were imposed by Congress to offset a payroll tax cut.
      0 Votes

    • JS
      Apr, 2012
      Josh
      Bret S. The President does not run the FHA. FHA having such low rates deserves to make people pay up by hiking the rates .10% monthly and .50% up front. If people do not like paying MIP or PMI maybe, just maybe they shouldn't be buying a house.
      0 Votes

    • KE
      Jun, 2012
      Kris
      Brilliant, what we really need is fewer home buyers and more houses to stay on the market right now. This is one potential buyer having a hard time justifying significantly extra monthly costs. Just 0.1% increase represents $300/month for a low cost home in California. There is a time for raising and a time for cutting taxes, and both should be done at the right times, just not sure now is the time to discourage spending etc. What good are the low mortgage rates, if we supplement them with other fees and taxes?
      0 Votes

  • SH
    Feb, 2012
    Suzanne
    Hello, I was advised by a HUD housing counselor that because my loan was behind and considered in default I could file a partial claim against my PMI/MPI insurance to help me catch up and reinstate the loan. I have been told by my lender that is not a true statement. That the insurance is there to protect them in case I totally default and they have to liquidate the property. Who is right? Just as an aside question, if the lender is correct, what incentive do they have to work with homeowners who have had an issue but are trying hard to get it worked out and get caught up?
    0 Votes

    • BA
      Feb, 2012
      Bill
      The lender is correct that Mortgage Insurance is designed to help the borrower receive a loan, generally with a high LTV, and also protect the lender in case the borrower defaults on the loan. Perhaps the HUD adviser thought that you had a different type of insurance. You can speak with another HUD housing counselor and see if they have a different suggestion. Lender's are interested in seeing that a loan is paid on time. They also do not want to see a loan go into default. Therefore speak with your lender about loan modification programs. For more information read the Bills.com article about government programs.
      0 Votes

    • DB
      Mar, 2012
      Daniel
      PMI/MIP insurance doesn't insure the borrower; it insures the lender. A borrower cannot make a claim against PMI/MIP insurance to get money to catch up on delinquent payments. I'd advise you to try to work out an arrangement with your current lender, to see if you can get back on track with your payments.
      0 Votes

    • PI
      Mar, 2012
      Private
      FHA partial claim is possible. HUD counselor is correct. It is part of the HUD-FHA handbooks Loss Mitigation requirements.It is clearly outlined on the HUD website in the "Mortgage Letters". In fact, depending on your situation a partial claim can be combined with a modification. The partial claim would bring your loan current and a modification would bring it to 31% of your gross income. It is not straight forward, in fact, after nearly 2 years and HAVING TO GET AN ATTORNEY involved, the final FHA Loan Modification paperwork (Subordinate Note for the Partial Claim and a modification to principal balance and interest rate) are being finalized for signature. Patience, lawyer and knowing what is said in the HUD "Mortgagee Letters" is important!
      0 Votes

    • DB
      Mar, 2012
      Daniel
      Private I replied here 3/12/12, and has a good point (see his/her post). Although the MIP on a FHA loan insures the lender, as opposed to the borrower, the lender can sometimes utilize the "partial claim" to assist the borrower in getting back on track. The "partial claim" moves the liability for the delinquent payments to the "backside" of the loan, thereby delaying the timing of when those payments are due from NOW until AFTER the regular future payments are paid off.
      0 Votes

  • TT
    Feb, 2012
    Tom
    I am in the process of getting an FHA loan and my lender is telling me that there is a new law that has just passed stating that pmi on FHA loans are now going to stay on the loan for the life of the loan.. Is it true?
    0 Votes

    • BA
      Feb, 2012
      Bill
      To my knowledge there is no new law that requires mortgage insurance for the life of an FHA loan.
      0 Votes

    • DB
      Feb, 2012
      Daniel
      As a loan originator, I haven't heard anything about MIP being a lifelong obligation. It seems very contrary to their purpose, so I think you got some incorrect information from your lender. MIP's purpose is to protect the lender against your not paying off the loan, when the value of the property could be less than what you paid for it. When your equity exceeds 22% there is a lesser chance that you will fail to keep up the payments.
      0 Votes