Buying a home with a small down payment can be a challenge, but the Federal Housing Administration (FHA) loan program makes it possible. FHA loans require a down payment as low as 3.5%, making homeownership more accessible for many buyers. However, one of the trade-offs is the requirement to pay FHA mortgage insurance premiums (MIP) for the life of the loan or until certain conditions are met.
If you're an FHA borrower, you've likely been wondering, "When can I drop FHA mortgage insurance?" This article will provide you with a comprehensive guide to understanding when and how you can remove FHA mortgage insurance from your monthly payments.
Understanding FHA Mortgage Insurance
Before diving into when you can drop FHA mortgage insurance, it's essential to understand what it is and why it's required.
FHA mortgage insurance is an insurance policy that protects lenders against potential losses if a borrower defaults on their FHA loan. This insurance is required for all FHA loans, and the premiums are typically added to your monthly mortgage payment.
FHA mortgage insurance consists of two components:
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Upfront Mortgage Insurance Premium (UFMIP): This is a one-time fee, typically between 1.75% and 2.25% of the loan amount, that is paid at closing or rolled into the loan balance.
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Annual Mortgage Insurance Premium (MIP): This is an annual fee, typically between 0.45% and 1.05% of the loan amount, that is divided into monthly payments and added to your mortgage payment.
The exact rates for FHA mortgage insurance depend on factors such as your loan amount, down payment amount, and the term of your loan.
When Can You Drop FHA Mortgage Insurance?
The ability to drop FHA mortgage insurance depends on several factors, including the loan-to-value ratio (LTV), loan term, and when you obtained your FHA loan.
Loans Obtained Before June 3, 2013
If you obtained your FHA loan before June 3, 2013, you can drop the annual MIP once you have paid it for at least five years and your loan balance reaches 78% of the original purchase price or appraised value (whichever is lower).
For example, if you purchased a home for $200,000 with an FHA loan in 2010, and the appraised value was $210,000, once your loan balance reaches $156,000 (78% of $200,000) and you've paid the MIP for at least five years, you can request to have the MIP removed from your monthly payments.
Loans Obtained On or After June 3, 2013
For FHA loans obtained on or after June 3, 2013, the rules for dropping FHA mortgage insurance are different. In these cases, the MIP is typically required for the entire loan term, regardless of the LTV.
However, there are two exceptions:
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Loan Term of Less Than 30 Years with an Original LTV of 90% or Less: If your loan term is less than 30 years and your original LTV was 90% or less, you can drop the MIP once your LTV reaches 78%.
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Loan Term of 30 Years with an Original LTV of 78% or Less: If your loan term is 30 years and your original LTV was 78% or less, you can drop the MIP after 11 years of payments.
It's important to note that these exceptions apply only to the MIP portion of the insurance. The UFMIP is required for all FHA loans and cannot be dropped or refunded.
How to Drop FHA Mortgage Insurance
If you meet the eligibility criteria for dropping FHA mortgage insurance, you'll need to follow these steps:
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Request a New Appraisal: Your lender will likely require a new appraisal to determine the current value of your home and calculate the LTV. Be prepared to pay for this appraisal, which can cost several hundred dollars.
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Provide Documentation: Your lender may request additional documentation, such as proof of income, employment, and other financial information, to ensure you still qualify for the loan without MIP.
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Submit a Request to Your Lender: Once you have the necessary documentation, submit a formal request to your lender to remove the MIP from your monthly payments.
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Wait for Approval: Your lender will review your request and documentation. If approved, they will remove the MIP from your monthly payments, potentially saving you hundreds of dollars each month.
It's important to note that the process of dropping FHA mortgage insurance may vary slightly from lender to lender, so be sure to follow their specific guidelines and requirements.
Conclusion
FHA mortgage insurance is a valuable tool that allows many homebuyers to achieve their dream of homeownership with a smaller down payment. However, the associated premiums can add a significant cost to your monthly mortgage payments.
By understanding the eligibility requirements and following the proper steps, you can potentially drop FHA mortgage insurance and save yourself a substantial amount of money over the life of your loan.
Remember, the key factors to consider are the loan-to-value ratio, the loan term, and when you obtained your FHA loan. If you meet the criteria, don't hesitate to explore the option of removing FHA mortgage insurance from your monthly payments.