Does FHA Mortgage Insurance Drop Off?
Navigate FHA mortgage insurance: understand when it expires automatically and what steps to take if it doesn't.
A mortgage insured by the Federal Housing Administration (FHA) offers a pathway to homeownership for many individuals. These loans often feature more flexible qualification standards, such as lower down payment requirements and broader credit score considerations. A key component of FHA loans is Mortgage Insurance Premium (MIP), which protects the lender against potential losses if a borrower defaults. This insurance enables lenders to offer these accessible loan products.
Types of FHA Mortgage Insurance
FHA loans involve two distinct types of mortgage insurance premiums. The first is the Upfront Mortgage Insurance Premium (UFMIP), a one-time fee typically equal to 1.75% of the loan amount. This premium is usually paid at closing, though it can also be financed into the total loan amount and paid over the loan term.
The second type is the Annual Mortgage Insurance Premium (MIP), which is an ongoing charge paid monthly as part of the mortgage payment. This annual premium is calculated as a percentage of the outstanding loan balance, with rates generally ranging from 0.15% to 0.75%. The specific rate depends on factors like the loan amount, loan term, and the initial loan-to-value (LTV) ratio.
When FHA Mortgage Insurance Drops Off Automatically
Whether FHA mortgage insurance automatically terminates depends on the loan’s origination date and its initial loan-to-value (LTV) ratio. For FHA loans originated before June 3, 2013, the Annual MIP can automatically cease. This occurs when the loan’s principal balance is paid down to a point where the LTV ratio reaches 78% of the home’s original appraised value.
Once this 78% LTV threshold is met, the mortgage servicer should automatically cancel the MIP, assuming the borrower has maintained a history of on-time payments. However, these specific conditions apply only to loans endorsed before the policy changes implemented in June 2013.
When FHA Mortgage Insurance Does Not Drop Off Automatically
For FHA loans originated on or after June 3, 2013, the rules regarding MIP termination are different and generally more stringent. For the majority of these newer FHA loans, the Annual MIP is required for the entire life of the loan. This applies if the borrower’s original down payment was less than 10% of the home’s purchase price, meaning the initial LTV was greater than 90%.
A limited exception exists for loans originated after this date if the borrower made a larger down payment. If the original down payment was 10% or more (LTV of 90% or less), the Annual MIP will terminate after 11 years.
Strategies for Removing FHA Mortgage Insurance
Since Annual MIP often does not automatically expire for recent FHA loans, many homeowners seek alternative methods to eliminate this cost. The most common strategy is refinancing the FHA loan into a conventional mortgage. This approach allows borrowers to shed the FHA’s mortgage insurance requirements, as conventional loans operate under different insurance guidelines.
To qualify for a conventional refinance, homeowners typically need to meet certain criteria, including sufficient home equity. Lenders generally require at least 20% equity in the property to avoid private mortgage insurance (PMI) on the new conventional loan. Borrowers also need a good credit score, often a minimum of 620 or higher, and may require a new appraisal to determine the home’s current market value.