FHA Mortgage Insurance Removal: How To Get Rid Of MIP

An FHA loan, or a mortgage backed by the Federal Housing Administration (FHA), is a popular loan option among first-time borrowers because of its low credit score and down payment requirements. If you’re a homeowner with an FHA loan and you made a down payment of 10% or less, you’re probably familiar with making monthly payments toward your mortgage insurance premium (MIP).

While MIP is usually a requirement for FHA loans, you may be able to remove it entirely under certain conditions. Let’s take a closer look at the FHA MIP to determine if you’re eligible for FHA mortgage insurance removal. 

What Is An FHA Mortgage Insurance Premium (MIP)?

An FHA MIP is a payment you make to insure your FHA loan. FHA mortgage insurance protects the lender and the FHA from losses if the homeowner defaults, or stops making payments, on the mortgage. If a situation arises where you can’t pay back your FHA loan, the FHA covers your lender with this insurance policy. The FHA MIP payments you make contribute toward these insurance costs.

When you close on your home, you’ll pay an upfront portion of the FHA MIP. The upfront MIP cost is typically equal to 1.75% of the total value of your FHA loan. For instance, if you borrow $300,000 for your home loan, you have to make an upfront MIP payment of $5,250. This portion of the payment is due at closing.

While the upfront MIP is a one-time payment, you still must also make monthly payments toward your annual MIP. The amount of your annual MIP depends on a few factors, including:

• The loan amount
• The size of your down payment
• The length of your loan term

Borrowers can expect to pay 0.45 – 1.05% of the loan amount on the annual MIP, though your MIP annual cost could be more or less. These costs are typically added to your monthly mortgage payments. To find out how much you pay toward your annual MIP each month, just divide the annual amount by 12. 

Conventional Loan PMI Vs. FHA Loan MIP

Homeowners who have a conventional loan and put less than 20% down on their home are also required to pay mortgage insurance, though for conventional loans it’s called private mortgage insurance (PMI). Similar to FHA mortgage insurance, PMI protects lenders from potential losses if a homeowner stops making mortgage payments. Once you reach 20% equity in your home by making mortgage payments, however, you can request to cancel your PMI. You can avoid paying for PMI altogether by making a down payment of 20% or more.

While you may be able cancel or avoid PMI payments on a conventional loan, FHA loan MIP payments can be a bit trickier to get rid of. Let’s discover whether FHA MIP removal is possible for you. 

Can You Remove FHA MIP?

In short, it’s possible to cancel your FHA MIP – but a number of factors determine your eligibility to do so. One of the biggest factors is simply the date when you took out your FHA loan, otherwise known as the mortgage origination date.

According to the U.S. Department of Housing and Urban Development (HUD), you may be eligible for FHA MIP removal if you meet any of the following criteria: 

• If your loan origination date falls between January 2001 and June 2, 2013, your MIP will be canceled once you reach a loan-to-value (LTV) ratio of 78%.
• If your loan origination date is on or after June 3, 2013, your MIP will be canceled if you’ve made a down payment of 10% or more and paid mortgage insurance for at least 11 years.

If your loan origination date falls between July 1991 and December 2000, you likely can’t remove FHA MIP. But you can still contact your lender to see if you might qualify for FHA MIP removal via another method.

How To Remove FHA Mortgage Insurance

If you’re determined to remove your FHA MIP, you may want to consider refinancing your FHA loan to a conventional loan. Before choosing to refinance, you’ll want to determine if this is the best move for your financial situation. You should also consider what refinancing means for the future of your mortgage and your loan payments.

Refinancing Your FHA Loan To A Conventional Loan

Refinancing to a conventional mortgage eliminates your FHA MIP payments, but it’s best to make sure the move to refinance will save you money in the long run. Always compare your existing MIP costs with potential PMI costs that come with a conventional loan.

You’ll also need to meet the minimum requirements to refinance to a conventional loan. Rocket Mortgage^® requires:

• A 620 minimum credit score
• 50% maximum debt-to-income (DTI) ratio
• Proof of income
• Verification of homeowners insurance
• A home appraisal

If you don’t want to make PMI payments on a conventional loan, you’ll need at least 20% equity in your home. It might be worth not refinancing your mortgage until you have a higher credit score or more home equity. Otherwise, it may be hard to avoid paying for PMI.

If you’re ready to move forward in the refinancing process, it’s important to compare mortgage lenders to find the best rate for you.

Pros And Cons Of Refinancing To A Conventional Loan

Refinancing from an FHA loan to a conventional mortgage comes with benefits and drawbacks. Keep the following pros and cons in mind when deciding whether refinancing is best for your financial situation.

Pros

• Refinancing to a conventional loan eliminates your FHA MIP payments.
• You may get a lower interest rate if you refinance when rates are lower than when you took out your first mortgage.
• You may be able to take cash out if you’ve built enough equity in your home.

Cons

• You may still have to make PMI payments with a conventional loan.
• You’ll need to go through the loan approval process again, which can be tedious.
• You still must pay closing costs when you refinance.

Alternatives To A Conventional Loan Refinance

If refinancing to a conventional loan isn’t the best option for you, a cash-out refinance is one alternative. A cash-out refinance is similar to a conventional loan refinance in that you still have to go through the process of getting approved for the new loan and paying for closing costs. This option does, however, remove your MIP payments. 

Plus, a cash-out refinance allows you to convert your home equity into cash, which you can use for debt consolidation, home improvements and pricier home projects. Keep in mind that you’ll need to meet your mortgage lender’s minimum requirements to qualify for a cash-out refinance.

FHA MIP Removal FAQs

Do you still have questions about removing the MIP from an FHA loan? Let’s walk through some frequently asked questions.

Does the FHA always require mortgage insurance?

Yes, the FHA requires all borrowers to pay for mortgage insurance unless they make a large enough initial down payment. Borrowers make two MIP payments: upfront MIP and annual MIP. 

Can I avoid the FHA MIP?

You can’t completely avoid paying MIP when you take out an FHA loan, unless your loan origination date falls within the designated time frames for exemption set by HUD.

You can lower your MIP payments by making a larger down payment on your house or purchasing a more affordable property. Or, you can potentially get rid of your MIP payments completely by refinancing to a conventional loan.

When can mortgage insurance be removed from an FHA loan?

Your MIP will be removed once you reach an LTV ratio of 78% if you took out your mortgage between January 2001 and pre-June 3, 2013. It’ll also be canceled if you pay off your loan before the end of the loan term and your loan originated on or after June 3, 2013.

Your MIP likewise gets removed after 11 years if you put 10% down on your home.

The Bottom Line

FHA loans are a popular mortgage option because they can be easier to qualify for when buying a home. However, with MIP payments in the mix, you may end up paying more over the life of the loan.

Fortunately, you have options for FHA mortgage insurance removal. Speak with your lender to see if you qualify for MIP cancellation. You may also be able to refinance to a conventional loan if you’re intent on removing your MIP payments.

Whether you’re ready to refinance or interested in learning more about how you qualify for a mortgage, get started by filling out an application online today.