How to Lower the PMI on Your FHA Loan

FHA loans are government-backed mortgages designed to make homeownership more accessible, especially for individuals who might not qualify for conventional loans. These loans offer benefits such as lower down payment requirements, often as low as 3.5%, and more flexible credit criteria, making them a popular choice for first-time homebuyers. However, they come with a mandatory cost known as the Mortgage Insurance Premium (MIP). This insurance protects lenders against financial losses should a borrower default. Understanding how MIP works and exploring options to reduce or eliminate these payments can lead to significant financial savings.

Understanding FHA Mortgage Insurance Premium

FHA Mortgage Insurance Premium (MIP) has two components: the Upfront Mortgage Insurance Premium (UFMIP) and the Annual Mortgage Insurance Premium (Annual MIP). UFMIP is a one-time charge, typically 1.75% of the loan amount, usually financed into the loan. This premium is required regardless of the down payment.

The Annual MIP is a recurring charge collected monthly as part of your mortgage payments. Its rate varies based on factors like the loan’s original loan-to-value (LTV) ratio, loan amount, and term. For example, a common annual MIP rate for a 30-year fixed-rate mortgage might be 0.55% of the loan amount, divided into 12 monthly payments.

Eligibility for FHA MIP Removal

Eligibility for FHA MIP removal depends on your loan’s origination date.

Loans Originated Before June 3, 2013

For FHA loans originated before June 3, 2013, MIP can be removed once the loan balance reaches 78% of the property’s original appraised value or initial sales price. For 30-year loans, MIP must also have been paid for at least five years. For 15-year loans originated before this date, the 78% LTV rule applies without the five-year payment requirement.

Loans Originated On or After June 3, 2013

For FHA loans with case numbers assigned on or after June 3, 2013, MIP cancellation criteria are more restrictive. If the original down payment was less than 10%, Annual MIP is required for the entire loan term. The only way to eliminate MIP in this scenario is to refinance out of the FHA loan program. If the original down payment was 10% or more, MIP can be removed after 11 years.

Conventional Loan Refinance Eligibility

To refinance to a conventional loan to remove MIP, you must meet conventional financing eligibility. This includes a minimum credit score, often 620 or higher, though scores of 680 or more can secure better rates. Lenders also review debt-to-income (DTI) ratios, typically preferring them to be 36% or less, though up to 45% may be acceptable with strong credit. To avoid private mortgage insurance (PMI) on a conventional loan, you generally need at least 20% equity in the property (80% LTV or lower). If less than 20% equity is held, conventional loans will require their own form of mortgage insurance, PMI, which can be cancelled once 20% equity is achieved.

Steps to Remove FHA MIP

Refinancing to a conventional loan is a common method to remove FHA MIP, especially for loans originated after June 3, 2013. This process involves applying for a new mortgage with a conventional lender and submitting financial documentation. The lender will typically order a new appraisal of your property to determine its current market value and loan-to-value ratio. The application then proceeds through underwriting, where the lender assesses your financial standing. If approved, the refinance closes, paying off your FHA loan and replacing it with a new conventional mortgage.

Automatic MIP Cancellation

For FHA loans originated before June 3, 2013, automatic MIP cancellation may occur once specific criteria are met. If your loan reaches a 78% LTV ratio based on the original value and meets any time-in-force requirements, the mortgage servicer should automatically cease collecting Annual MIP. Monitor your monthly mortgage statements to confirm the removal of the MIP charge once you meet eligibility. If MIP is still charged despite eligibility, contact your loan servicer.

Manual MIP Cancellation Request

For older loans where prepayments have accelerated equity, a manual request for MIP cancellation might be necessary. Contact your loan servicer directly. You will need to provide loan details and follow their instructions, which may involve submitting documentation to show your loan has reached the required LTV threshold due to principal reduction. The servicer will review your request against FHA guidelines and confirm if the cancellation is possible.

Accelerating Principal Payments

Accelerating principal payments can significantly help you reach the LTV threshold sooner, thereby facilitating MIP removal through automatic cancellation or a conventional refinance without PMI. This strategy not only helps eliminate MIP faster but also reduces the total interest paid over the life of the loan. Ways to make extra principal payments include:
Adding a small amount to your regular monthly payment, effectively making an extra payment over the course of a year.
Making bi-weekly payments, which results in 26 half-payments annually, equating to one additional full monthly payment per year.
Applying lump-sum payments, such as from a tax refund or bonus, directly to the principal balance.

When making extra payments, clearly specify to your lender that the funds should be applied to the principal balance, not future interest or escrow. This ensures they contribute to building equity and reducing the loan balance faster.