FHA Mortgage Insurance

The FHA loan insurance program was created to help first-time buyers get into homes. However, first-time buyers usually don't have 20% down payments and may have a spottier credit history. In order to provide protect taxpayers from paying for defaulted FHA mortgages, the loans include mortgage insurance premiums (MIP).

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If you already pay MIP, you be due a refund. Review the last section of this article for more information.

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.

Rate: The FHA MIP is also mandated at .5% of the loan amount per year, divided over 12 months. PMI rates are also usually .5% divided over 12 months, but the rates do vary by lender.

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 cancelled 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 doesn't go towards the principal. If you don't have a 20% down payment, then you will most likely have to pay it for any loan, whether it's from the

FHA or a conventional lender. In that case, carefully compare the costs of each loan.

If you've saved a 20% down payment and have a good credit history, then a conventional mortgage is probably better for you because you won't 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.

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
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.

If you didn't 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've already applied and didn't receive a response within 120 days, contact HUD. You can reach them by phone or by mail.

Phone: (800) 697-6967, 8:30 a.m. to 8:30 p.m. Eastern Standard Time, Monday through Friday.

Mail: U.S. Department of Housing and Urban Development, P.O. Box 23699, Washington, DC 20026-3699.

Note: 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.

Mortgage insurance is considered a burden by man, but if it's the only thing standing between you and homeownership, it's a burden worth bearing.

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