Mortgage Concepts: When Can a Borrower Cancel FHA Mortgage Insurance?
Mortgage Concepts is a recurring video series covering best practices and compliance training for California mortgage originators. This video explains when a borrower can cancel Federal Housing Administration (FHA) mortgage insurance. To obtain course credits for your NMLS license renewal, visit firsttuesday.us.
Borrowers can choose a Federal Housing Administration (or FHA) insured mortgage over a conventional mortgage for the low minimum down payment requirement of 3.5%.
This makes FHA-insured mortgages especially popular with first-time home buyers who haven’t saved much 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. The MIPs of all FHA-insured borrowers are placed in the HUD Mutual Mortgage Insurance Fund.
In turn, the Mutual Mortgage Insurance Fund reimburses lenders for the principal amount owed on mortgages in the event of borrower default.
This is how HUD, through the FHA and private lenders, encourages home ownership in America. The FHA requires payment of two different MIPs: the initial MIP and the annual MIP.
The initial MIP is paid once at closing and is terminated. It is paid on virtually all FHA insured mortgage programs.
The annual MIP is paid for 11 years Where the life of the loan, depending on the LTV. For borrowers taking advantage of the 3.5% down payment, the annual MIP lasts for the life of the loan.
So, if your FHA borrower initially staked only 3.5% on their purchase, they will continue to pay the annual MIP as long as they keep their mortgage. Achieving an LTV of 80% has no effect on their annual MIP payout.
Contrast this with the private mortgage insurance that is required on conventional loans with LTVs above 80%. Private mortgage insurance can be terminated at the borrower’s request at 80% LTV and automatically terminates 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 are obligated to pay, before closing day.