How to Remove MIP From an FHA Loan
Do you have an FHA loan? If so, are you wondering how to remove PMI from an FHA loan? For many first-time homebuyers, FHA loans offer lower down payments and more flexibility in credit scores, turning your dreams of homeownership into reality.
However, one caveat of flexibility in the underwriting process is mortgage insurance premiums (MIP), which can be challenging to remove. Our article will cover the basics of PMI insurance, including the average cost added to your mortgage payment and how to eliminate PMI on an FHA loan.
Private mortgage insurance (PMI) protects the lender if you default on your loan. Lenders pass this cost down to the borrower as an additional monthly payment on the mortgage. FHA loans have a special type of PMI called Mortgage Insurance Premiums, or MIP.
All FHA loans come with some type of MIP. However, with a down payment of 10% or more, you’ll only pay MIP for a maximum of 11 years. With a down payment under 10%, you will pay MIP for the entirety of your loan.
MIP comprises two components: an upfront premium and an annual premium. The upfront premium is generally calculated as a percentage of the loan. You have two options to pay upfront mortgage insurance premiums. First, you can pay the upfront MIP in cash at closing. The other option is to bundle the cost into your loan.
In addition to upfront MIP, lenders tack on an annual MIP to your monthly mortgage payment. Annual MIP is calculated as a percentage of your loan balance at the beginning of the year, so your annual MIP payments will decrease over the life of your loan.
MIP and PMI are additional insurance payments that protect the lender; however, they differ in some ways. MIP applies to FHA loans, while PMI applies to conventional loan products. The next difference is in the term assessed. PMI drops off once borrowers achieve a 20% loan-to-value (LTV). Depending on your down payment, removing FHA PMI can be more complex. We’ll cover how to eliminate PMI on an FHA loan later on.
The upfront and annual mortgage insurance premiums vary based on the lender and the amount financed, but most lenders impose a rate of 1.75% of the total loan amount for upfront MIP. For example, if you take out a $200,000 loan, expect to pay $3,500 upfront. If you decide to pay the upfront MIP at closing, you will need to add $3,500 to your down payment amount. Bundling the upfront MIP into your loan would create a new loan amount of $203,500.
The second type of MIP that FHA loans come with is annual MIP. While each lender has different percentages, expect to pay between 0.15% and 0.75% of the total loan cost. Let’s say that your lender charges a rate of 0.55%, and your loan balance is $200,000 at the beginning of the year. This results in an annual MIP of $1,100. Dividing this by 12 gives you a monthly MIP payment of $91.67.
FHA MIP is extra protection for your lender in the event of a default. Although you can’t avoid upfront MIP when you close on your FHA loan, there are ways you can secure FHA PMI removal for the annual portion. Here are three steps to eliminate PMI on an FHA loan.
The first step is to determine your eligibility. Only certain circumstances allow PMI insurance removal on FHA loans. If you took out your mortgage before June 3, 2013, you need to meet the following conditions:
If you took out your mortgage after June 3, 2013, you must meet the following criteria for FHA PMI removal:
If you meet the above criteria, you can cancel your MIP while keeping your existing FHA loan. Typically, your annual MIP will automatically cancel once you’ve been paying for 11 years or your loan-to-value drops below 78%. If it doesn’t automatically drop off, contact your loan servicer.
If you don’t meet the above criteria, you can refinance your mortgage into a conventional loan. Refinancing into a conventional loan is similar to taking out a new loan, meaning you must meet credit score, equity, and income requirements.
Whether your MIP is automatically dropping off or you are refinancing into a conventional loan, it’s important to contact your lender throughout the process. Your lender can guide you through the best option for you.
If you refinance into a conventional loan product, you will no longer pay MIP. However, if your loan-to-value is higher than 20%, you may pay PMI.
FHA loans require some form of MIP. Other loan products, like a conventional loan, do not always require PMI with a 20% or greater down payment. However, conventional loan products are more rigid in the underwriting process, meaning you may qualify for an FHA loan but not a conventional loan.
MIP rates are subject to change based on current legislation. For example, in 2023, the U.S. Department of Housing and Urban Development implemented a 35% price cut in annual MIP. This reduction resulted in more cost savings for all FHA loan users. Similarly, the maximum FHA loan amount increases yearly to account for inflation. For 2025, the ceiling is $1,209,750, helping borrowers in high-cost-of-living housing markets.
Certain changes in FHA policies can impact existing loans. For example, the recent annual MIP price cut impacts all FHA loans, both current and new. However, updates to the maximum loan amount won’t impact your current loan.
Your credit score will not impact your MIP payment amount. MIP is determined by the amount of equity you have in your home and your loan amount.
FHA loans are not available on second homes or investment properties. However, there are some workarounds if you want to purchase a home to become an investment property. If you purchase a multifamily unit, you can live in one of the units and rent out the others. You can also rent out a single-family home as long as you’ve satisfied the occupancy regulation of living in the property for at least one year. In these situations, you would still need to pay annual MIP until it’s eligible to be removed.
When you purchase a home, your mortgage lender will place your upfront MIP into an escrow account. If you decide to sell within the first three years, you may be eligible for a partial refund on your upfront MIP payment.
