When Can You Drop Mortgage Insurance on an FHA Loan?

Mortgage insurance on Federal Housing Administration (FHA) loans protects lenders against financial losses if a borrower defaults. These loans are designed to make homeownership more accessible, often requiring lower down payments and having more flexible credit guidelines compared to conventional mortgages. A mandatory component of FHA loans is the Mortgage Insurance Premium (MIP), which involves both an upfront fee and an annual premium paid monthly. Understanding the conditions for removing this premium can lead to significant savings over the life of a loan.

Conditions for FHA MIP Cancellation

The ability to cancel FHA Mortgage Insurance Premium (MIP) largely depends on the loan’s origination date and the initial loan-to-value (LTV) ratio. Rules distinguish between loans closed before and those closed on or after June 3, 2013. This specific date marks a significant policy change regarding MIP duration.

For FHA loans originated before June 3, 2013, MIP can be removed under specific circumstances. MIP ceases once the unpaid principal balance reaches 78% of the lesser of the home’s original purchase price or appraised value. Additionally, the mortgage insurance must have been in force for a minimum of five years. Both conditions must be met for cancellation.

A different set of rules applies to FHA loans with case numbers assigned on or after June 3, 2013. For these loans, MIP duration is primarily determined by the original loan-to-value (LTV) ratio at closing. If the original LTV was 90% or less, meaning the borrower made a down payment of at least 10%, the MIP will be cancelled after 11 years, provided all payments have been made on time. This provides a clear end date for MIP for borrowers with a higher initial equity stake.

However, if the original LTV was greater than 90%, which is common for borrowers making the minimum 3.5% down payment, MIP is required for the entire life of the loan. This means MIP continues indefinitely unless the loan is paid off or refinanced into a different loan type. This “life of loan” policy is a key distinction for many FHA borrowers.

Process for Cancelling FHA MIP

When an FHA loan meets eligibility conditions for MIP cancellation, the homeowner should contact their mortgage loan servicer. The servicer verifies the loan’s terms and payment history align with FHA criteria for MIP removal, often confirming the loan balance relative to the original value and on-time payments.

For loans originated before June 3, 2013, where the 78% LTV threshold applies, the servicer will calculate whether this equity level has been reached based on the original loan amount and value. In some situations, particularly if the original appraisal is outdated or if there’s a need to confirm current market value, an updated appraisal might be requested to verify the loan-to-value ratio. This ensures the lender has accurate information to process the cancellation.

While some servicers may automatically remove MIP once the criteria are met, homeowners should proactively confirm cancellation with their servicer. This proactive step helps ensure that the MIP is indeed removed from future monthly statements. Homeowners should request and retain written confirmation from their servicer that the MIP has been successfully cancelled.

Refinancing to Eliminate Mortgage Insurance

Refinancing is a strategy for homeowners to eliminate FHA Mortgage Insurance Premium (MIP), especially for loans requiring MIP for the entire loan term. The most common approach involves refinancing the FHA loan into a conventional mortgage. This allows borrowers to transition away from FHA-specific MIP rules.

Conventional loans, however, require Private Mortgage Insurance (PMI) if the loan-to-value (LTV) ratio is above 80%. This means if a borrower has less than 20% equity, they will still pay mortgage insurance, albeit a different type. The advantage of PMI is that it can be cancelled once a borrower reaches 20% equity in their home, or automatically ceases when the LTV drops to 78% of the original value. This offers a more flexible path to insurance removal compared to FHA’s “life of loan” policy.

To qualify for a conventional refinance, borrowers need a credit score of at least 620 and a debt-to-income ratio not exceeding 45%. The main hurdle for many is achieving sufficient home equity, as a new appraisal will be required to determine the current market value and calculate the new LTV. If the home’s value has increased significantly, this can help a borrower reach the equity threshold faster.

Refinancing does involve closing costs, which can include appraisal fees, title insurance, and loan origination fees, ranging from 2% to 5% of the new loan amount. Homeowners should weigh these upfront costs against the long-term savings from eliminating MIP or reducing monthly insurance payments. The decision to refinance should consider both the immediate expenses and the potential for reduced monthly housing costs.