Mortgage insurance premiums (MIP) apply specifically to homebuyers with Federal Housing Authority (FHA) mortgages. In many cases, homebuyers with credit scores between 580 and 620 obtain FHA mortgages because credit requirements are more lenient, and down payments can be as low as 3.5%, as opposed to the minimum 5% required for most conventional mortgages. Lower credit scores, coupled with a minimal down payment, often categorize FHA buyers as higher risk borrowers. Mortgage insurance premiums are designed to shield lenders against buyer default.
How do mortgage insurance premiums get calculated?
FHA mortgages include a 1.75% upfront mortgage insurance premium (UFMI) paid by the borrowers at closing, or it can be rolled into the mortgage loan. In addition to the UFMI, borrowers pay an ongoing MIP that ranges from 0.45% to 1.05% of the total mortgage loan.
How much a borrower pays for mortgage insurance premium depends on several factors, including the loan total, down payment amount and other loan terms, such as the overall interest rate. Annual mortgage insurance premiums are added to the borrower’s monthly mortgage payment.
Is there any way around a mortgage insurance premium?
You’re eligible to remove mortgage insurance premiums from an FHA loan after 11 years if you paid 10% or higher on your down payment or if you refinance to a non-FHA conventional mortgage loan. Other factors also influence the requirement, such as the date the loan originated and the loan-to-value (LTV) ratio.
Mortgage insurance premiums may be cancelled for FHA loans originated between Dec. 31, 2000 and July 3, 2013, once the borrower pays at least 78% of the mortgage LTV ratio, meaning the borrower has accrued at least 22% in home equity.
FHA mortgage loans issued after July 3, 2013 with less than a 10% down payment must pay the premium for the duration of the loan.