How to Remove Mortgage Insurance From an FHA Loan

FHA loans offer an accessible pathway to homeownership due to flexible qualification criteria. A common feature of these loans is the requirement for Mortgage Insurance Premium (MIP). This insurance protects the lender from potential losses if a borrower defaults. While similar to Private Mortgage Insurance (PMI) on conventional loans, the correct term for FHA loans is MIP. This article explains how to remove FHA MIP, potentially reducing your monthly housing expenses.

Understanding FHA Mortgage Insurance Premium Duration

The duration of FHA Mortgage Insurance Premium (MIP) depends on your loan’s origination date and initial loan-to-value (LTV) ratio. For loans originated on or after June 3, 2013, MIP cancellation rules are specific. If the initial LTV was 90% or less, annual MIP is assessed for 11 years. If the initial LTV was greater than 90%, annual MIP is required for the entire life of the loan.

For FHA loans originated before June 3, 2013, specifically those closed on or after January 1, 2001, the MIP cancellation criteria differ. For these loans, annual MIP can be canceled once the loan’s unpaid principal balance reaches 78% of the original appraised value or purchase price, whichever was less. For mortgage terms greater than 15 years, this cancellation also requires at least five years of MIP payments.

Your original loan documents specify the initial loan amount and property value, which determine your initial LTV. To calculate your current LTV, divide your current loan balance by the property’s original appraised value or purchase price, whichever was lower. Understanding these conditions helps assess eligibility for direct MIP cancellation.

Initiating FHA Mortgage Insurance Premium Cancellation

Once your FHA loan meets MIP cancellation eligibility, contact your loan servicer to initiate the process. Your loan servicer, the company managing your mortgage, can provide their specific procedures for MIP removal.

When contacting your servicer, have your loan number ready for quick account access. Many servicers require a formal, often written, request for MIP cancellation. They may ask for documentation supporting your eligibility, such as a statement showing your current loan balance. For loans originated before June 3, 2013, relying on a 78% LTV, an appraisal might be necessary to confirm current property value.

After submitting your request and documentation, the servicer will review your loan against FHA guidelines. They will notify you of their decision. If approved, they will provide a timeline for when MIP collection will cease. For automatic termination, such as after 11 years, the servicer should manage cancellation without borrower action. However, it is prudent to follow up if payments continue past the expected date.

Refinancing Your FHA Loan to Remove Mortgage Insurance

Refinancing is a viable alternative for removing FHA Mortgage Insurance Premium, especially for loans not meeting direct cancellation criteria. It involves taking out a new mortgage to pay off your existing one, replacing your FHA loan with a different product. This new loan can be structured to eliminate the MIP requirement.

A common strategy is to refinance your FHA loan into a conventional loan. Conventional loans require Private Mortgage Insurance (PMI) only if the loan-to-value (LTV) ratio is above 80% at origination. Once you reach 20% equity (80% LTV), you can request PMI cancellation; it automatically terminates when LTV reaches 78% of the original value.

To qualify for a conventional refinance, lenders look for a minimum credit score of 620, though higher scores often secure better rates. Your debt-to-income (DTI) ratio is also a factor; most lenders prefer it under 43%, though some accept up to 50% depending on other factors. An appraisal will be required to determine your home’s current market value, essential for calculating the new LTV.

While an FHA Streamline Refinance is an option for existing FHA borrowers, it does not eliminate MIP. This refinance primarily aims to lower the interest rate or change the loan term, and a new Upfront Mortgage Insurance Premium (UFMIP) and annual MIP still apply. The FHA requires a Streamline Refinance to provide a “net tangible benefit” to the borrower, such as a reduction in the monthly principal and interest payment.

Refinancing involves financial considerations, including closing costs, which typically range from 2% to 6% of the new loan amount. These costs can sometimes be rolled into the new loan balance, increasing the total amount borrowed. Assess the break-even point: the time it takes for monthly savings to offset upfront refinancing costs. Evaluating changes in interest rates is also important; refinancing may not be beneficial if current rates are significantly higher than your existing FHA loan rate.