Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video discusses when a borrower can cancel Federal Housing Administration (FHA) mortgage insurance. For course credit toward renewing your NMLS license, visit firsttuesday.us.
Borrowers might choose a mortgage insured by the Federal Housing Administration (or FHA) over a conventional mortgage for the low 3.5% minimum down payment requirement.
This makes FHA-insured mortgages especially popular with first-time homebuyers who don’t have lot saved up for a down payment. But low down payments mean a borrower is less financially invested in the property.
Historically, borrowers with less “skin in the game” are more likely to default on their mortgages. So, in exchange for the low down payment, the FHA requires borrowers to pay mortgage insurance premiums, or MIPs. MIPs from all FHA-insured borrowers are placed into HUD’s Mutual Mortgage Insurance Fund.
In turn, the Mutual Mortgage Insurance Fund pays lenders the principal amount owed on mortgages when borrowers default.
This is how HUD, through the FHA and private lenders, encourages homeownership in America.The FHA requires payment of two different MIPs: the up-front MIP and the annual MIP.
The up-front MIP is paid once at closing, and is done with. It’s paid on virtually every FHA-insured mortgage program.
The annual MIP is paid for 11 years or the life of the loan, depending on the LTV. For those borrowers taking advantage of the 3.5% down payment, annual MIP lasts for the life of the loan.
So, if your FHA borrower originally put down only 3.5% when they purchased, they will continue paying annual MIP as long as they keep their mortgage. Reaching an 80% LTV has no effect on their annual MIP payment.
Contrast this with private mortgage insurance which is required on conventional loans with LTVs above 80%. Private mortgage insurance can be terminated on borrower request at 80% LTV, and terminates automatically at 78% LTV.
FHA-insured mortgages are a great tool to help homebuyers become homeowners. As with all loan products, just make sure your borrower is aware of the ramifications of the loans they’re obligated to pay, before closing day.