Can mortgage insurance be removed from an FHA loan?
FHA MIP, or mortgage insurance premium, is a type of insurance policy that protects lenders if an FHA loan holder defaults on his or her mortgage.
This insurance allows lenders to issue FHA loans requiring very small down payments and at low rates. FHA MIP reduces lender risk, and this allows them to be more accepting of lower credit scores.
The FHA home buyer pays for the policy upfront and monthly. Borrowers normally pay monthly MIP for the life of the FHA loan. But, there are ways to get rid of your mortgage insurance.
You can cancel it with a refinance. If you have an FHA loan opened prior to June 2013, you can also wait for it to terminate automatically.
FHA loans fall into two categories: those with case numbers issued by June 3, 2013, and applications dated after that.
FHA MIP cancellation depends on this classification because that’s when FHA rules changed.
Most FHA homeowners today have a loan with the following characteristics
- Opened after June 2013
- Less than 10% down original down payment
- 30-year loan
The bad news is this loan does not qualify to cancel MIP. The good news is there is no restrictions that prevent you from refinancing out of the FHA loan into a conventional loan without private mortgage insurance (MIP). In order to do this you must have a current loan-to-value (LTV) of at 80% or more.
If you received your FHA loan before June 2013, you are eligible for MIP cancellation after five years.
You must have 22% equity in the property, and you must have made all payments on time.
How to refinance out of a home loan with mortgage insurance
WIth the value of homes rising substantially, it’s the time to refinance in order to cancel MIP. Once a homeowner gets to 20% equity, they can refinance into a conventional loan with no mortgage insurance.
The process to do so is straightforward. Get an estimate of value from a local real estate agent or loan officer. It’s best to steer clear of online estimation sites because they tend to be dangerously inaccurate. See if you have around 20% equity based on your home’s estimated value. Be sure to add closing costs to your existing loan balance if you do not wish to pay them out of pocket.
Contact a lender to get a rate quote and get started on your MIP cancellation.