How to Cancel Mortgage Insurance on an FHA Loan

Federal Housing Administration (FHA) loans are government-backed mortgages that make homeownership more accessible. These loans often feature lower down payment requirements and more flexible credit criteria compared to conventional loans. A component of these loans, however, is the Mortgage Insurance Premium (MIP), an ongoing cost designed to protect the lender from potential losses if a borrower defaults. This means FHA loan holders pay an additional amount beyond principal and interest, making MIP characteristics and cancellation important to understand.

Understanding FHA Mortgage Insurance Premium

FHA Mortgage Insurance Premium (MIP) is mandatory insurance on FHA-insured loans. This premium serves to protect the lender, not the borrower, against financial loss if a homeowner is unable to make their mortgage payments and the loan goes into foreclosure. Unlike Private Mortgage Insurance (PMI) on conventional loans, which can often be canceled once a certain equity threshold is met, FHA MIP has different rules for termination.

There are two primary types of FHA MIP: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (Annual MIP). UFMIP is a one-time charge, typically 1.75% of the loan amount, usually financed into the loan balance rather than paid at closing. The Annual MIP is paid monthly and calculated as a percentage of the loan balance, with the rate varying based on factors like the loan term, loan-to-value (LTV) ratio, and original loan amount. The FHA requires MIP regardless of the down payment size, even if a borrower contributes 20% or more.

Meeting Eligibility for Cancellation

Eligibility for FHA MIP cancellation largely depends on the loan’s origination date and the terms established at that time. Understanding these criteria is important for homeowners seeking to eliminate this expense. A good payment history, meaning no 30-day delinquencies in the last 12 months, is a universal requirement for any form of MIP cancellation.

For FHA loans originated before June 3, 2013, annual MIP can be canceled once the loan-to-value (LTV) ratio reaches 78% of the original appraised value or purchase price. For 30-year loans from this period, an additional condition is that the loan must be at least five years old for automatic cancellation. For 15-year loans, the 78% LTV threshold is the primary factor, without the five-year waiting period.

Loans originated on or after June 3, 2013, face more stringent rules regarding MIP termination. If the original down payment was less than 10%, MIP is required for the entire life of the loan. This means that without refinancing, the MIP payments will continue until the loan is paid off. However, if the original down payment was 10% or more, the MIP can be canceled after 11 years of on-time payments.

The FHA does not consider new appraisals for MIP cancellation based on increased property value for loans originated after June 3, 2013. Therefore, for many loans originated after this date, refinancing into a conventional loan is often the most direct path to eliminate MIP if the automatic cancellation criteria are not met or if a homeowner wishes to remove it sooner.

Steps to Request Cancellation

Once an FHA loan meets MIP cancellation eligibility, the next step involves initiating the process with the mortgage servicer. The servicer handles cancellation and is the initial point of contact. Homeowners should contact their servicer to inquire about their loan’s eligibility and required procedures.

The servicer will review loan details to confirm whether criteria, such as LTV ratio or required payment duration, have been met. They may request information or documentation, though a new appraisal is not used by the FHA for MIP cancellation based on increased home value. However, if refinancing to a conventional loan is pursued, a new appraisal would be a standard part of that new loan application process to determine current equity.

If the loan qualifies for automatic MIP termination, the servicer should implement cancellation. Homeowners should proactively follow up with their servicer as they approach eligibility milestones, such as the 11-year mark or 78% LTV threshold for older loans, to ensure cancellation is processed. After the request is submitted and reviewed, the servicer will notify the homeowner of the decision.

Upon confirmation of cancellation, homeowners should diligently check their monthly mortgage statements to verify that the MIP is no longer being charged. This ensures removal has been successfully implemented and the monthly payment adjusted accordingly. If MIP payments continue despite confirmed eligibility, contacting the servicer again for clarification and resolution is necessary.