How to Get Rid of Mortgage Insurance on Your FHA Loan

Mortgage insurance on a Federal Housing Administration (FHA) loan protects the lender from financial loss if a borrower defaults. This insurance is an additional monthly cost for homeowners, often adding hundreds of dollars to their mortgage payment. Many borrowers seek ways to eliminate this recurring expense, aiming to reduce their overall housing costs. Navigating the rules for removing FHA mortgage insurance can be complex, as its termination criteria differ significantly from conventional mortgage insurance.

Understanding FHA Mortgage Insurance Premium

FHA loans include two types of mortgage insurance premiums (MIP): an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (AMIP). The UFMIP is a one-time charge, typically 1.75% of the loan amount, which borrowers usually finance into their loan balance. The AMIP is an ongoing charge calculated annually but paid monthly as part of the mortgage payment. This annual premium is a percentage of the outstanding loan balance, with rates generally ranging from 0.45% to 1.05% per year, depending on the loan term, the original loan-to-value (LTV) ratio, and the loan amount. Unlike private mortgage insurance (PMI) on conventional loans, which cancels automatically once a certain equity threshold is met, FHA MIP has distinct requirements for its removal.

Criteria for FHA MIP Termination

The automatic termination of FHA MIP depends on when the loan was originated and its initial loan-to-value (LTV) ratio. For FHA loans originated on or after June 3, 2013, the rules are particularly stringent. If the original LTV was 90% or less, the annual MIP may terminate after 11 years. This means borrowers continue paying the monthly premium for over a decade, even if their equity grows substantially during that period. However, for FHA loans originated on or after June 3, 2013, with an original LTV greater than 90%, the annual MIP is generally required for the entire life of the loan. Many FHA borrowers find that simply building equity in their home does not lead to the automatic cancellation of their mortgage insurance, unlike with many conventional mortgages where PMI can be canceled once 20% equity is achieved.

Refinancing to Eliminate FHA MIP

Given the strict criteria for automatic FHA MIP termination, refinancing into a conventional loan becomes the most viable strategy for borrowers to eliminate this recurring cost. This approach allows homeowners to convert their FHA loan into a mortgage that does not require FHA MIP, provided they meet the conventional lending criteria. The key to qualifying for a conventional loan without private mortgage insurance is having at least 20% equity in the home.

To prepare for a conventional refinance, homeowners should gather financial information. This includes details about their credit score, which needs to be in a solid range, often starting from the mid-600s, with higher scores yielding better interest rates. They will also need current income and employment documentation, such as recent pay stubs, W-2 forms, and tax returns. Information regarding the existing FHA loan balance and an estimated value of the home are crucial for determining eligibility and potential loan terms. Lenders will require bank statements to verify assets for closing costs.

Steps to Refinance and Remove FHA MIP

Once a homeowner has prepared financial information and documentation, the process of refinancing to a conventional loan can begin. The initial step involves shopping for a new lender and submitting a loan application for the conventional mortgage. The lender will then guide the borrower through the underwriting process, where financial documents are reviewed to assess creditworthiness and the ability to repay the new loan. An appraisal of the home will be scheduled as part of the underwriting process to determine its current market value.

This new appraisal is critical for calculating the home’s updated loan-to-value (LTV) ratio, which must be 80% or lower to avoid private mortgage insurance on the new conventional loan. After the appraisal and underwriting are complete, the lender will issue a conditional approval, followed by a closing disclosure detailing the final loan terms and costs. The final step is the closing, where all documents are signed, the new conventional loan replaces the existing FHA loan, and the obligation to pay FHA MIP is eliminated.