How to Get Rid of Mortgage Insurance on an FHA Loan

Many home loans include mortgage insurance, which increases monthly housing costs. For Federal Housing Administration (FHA) loans, this is called Mortgage Insurance Premium (MIP). MIP differs from Private Mortgage Insurance (PMI), which applies to conventional loans. Both protect lenders against financial loss if a borrower defaults, but their rules and cancellation policies vary. FHA loans require MIP due to lower down payment requirements and more lenient credit criteria, making homeownership accessible to more individuals.

Automatic Termination of FHA Mortgage Insurance Premium (MIP)

Automatic termination of FHA MIP depends on the loan’s origination date. For FHA loans assigned on or after June 3, 2013, MIP generally remains for the loan’s entire life if the original loan-to-value (LTV) was greater than 90%. If the original LTV was 90% or less, MIP automatically terminates after 11 years, provided all payments have been made on time. For many newer FHA loans, MIP is permanent unless the loan is refinanced.

For FHA loans originated between January 2001 and June 3, 2013, annual MIP typically cancels automatically once the unpaid principal balance reaches 78% of the lesser of the initial sales price or appraised value. This cancellation relies on the original amortization schedule and does not consider extra payments. The loan must be in good standing, with no payments more than 30 days delinquent during the previous 12 months, for this automatic termination to occur.

Borrower-Initiated FHA Mortgage Insurance Premium (MIP) Cancellation

Borrower-initiated FHA MIP cancellation requires specific eligibility criteria and a defined procedure. This option is generally available for FHA loans originated before June 3, 2013, as newer loans typically have different termination rules or require refinancing.

To be eligible, the loan must be in good standing, meaning no payments have been more than 30 days late in the last 12 months. The property must also be the borrower’s primary residence. A crucial criterion is reaching a Loan-to-Value (LTV) ratio, typically 78% of the original appraised value or purchase price, whichever was less at origination. This LTV calculation relies on the original property value, not a current appraisal.

Before contacting the loan servicer, gather relevant information, including the loan number and payment history. Understanding the current market value can help assess overall equity, but the official LTV for cancellation is based on original loan terms.

Once eligibility is confirmed, contact the loan servicer directly via their customer service number or a written request. The request should state the intent to cancel FHA MIP. The servicer will review loan details and eligibility based on FHA guidelines. Afterward, the servicer will notify the borrower of the outcome, including any required documentation or the effective cancellation date.

Refinancing an FHA Loan

Refinancing is another method for eliminating FHA Mortgage Insurance Premium. This process involves securing a new loan, typically a conventional mortgage, to pay off the existing FHA loan. A primary advantage is that conventional loans do not require MIP and can allow for complete removal of mortgage insurance if certain equity thresholds are met.

To avoid private mortgage insurance (PMI) on a new conventional loan, borrowers generally need at least 20% equity in their home. This means the new loan amount would be 80% or less of the home’s current appraised value. If a borrower refinances into a conventional loan with less than 20% equity, they would likely be required to pay PMI, which has different cancellation rules than FHA MIP.

The process for refinancing to a conventional loan includes a new application, credit check, income verification, and an appraisal to determine the home’s current market value. A higher credit score, generally at least 620, and a manageable debt-to-income ratio are typically required to qualify. While refinancing can eliminate FHA MIP and potentially secure a lower interest rate, it also involves new closing costs, which can range from 2% to 6% of the loan amount.