Mortgage insurance is a big part of the FHA program. When you took out your FHA loan, you paid an upfront mortgage insurance premium. You also pay the MIP each month with your mortgage payment. What if you want to remove MIP? Is it possible? If so, should you do so with the FHA Streamline Program?
The answer is two-fold. Yes, you can remove mortgage insurance premium, but you cannot do it with the streamline program. If you were to refinance with the streamline loan, you would start the process all over again. You’d pay another upfront MIP and you would owe mortgage insurance for the life of the loan or until you pay it off.
The Exception to the Rule
There is one exception to the rule – if your FHA loan originated prior to June 3, 2013, you may be eligible to knock off your MIP. FHA loans originated prior to this date can remove MIP once they owe less than 78% of the home’s value. This sounds simple, but it takes quite a while to go from a 96.5% LTV to a 78% LTV.
However, the key is keeping that loan. If you refinance into today’s lower rates with the Streamline FHA program, you lose your ability to cancel MIP.
How to Remove MIP Other Ways
The good news is you are not stuck with the MIP if your FHA loan originated after June 3, 2013. You can still refinance your loan, just with a different program. This time, you want to go conventional. You may have to wait a little while before you do so, though. Stop and think about why you went with the FHA loan. Did you:
- Have less than perfect credit
- Not have a lot of money to put down
- Have a higher than 28/36 debt ratio
- Have a recent bankruptcy or foreclosure
If you had one or more of these situations, you probably did not qualify for conventional financing. If it’s been a few years and you straightened your situation out, you may be eligible now, though. Generally, in order to qualify for a conventional loan, you need:
- Credit score of at least 680
- Maximum 28% housing payment compared to your gross monthly income
- Maximum 36% total debt payments compared to your gross monthly income
- Proof of steady income for the last 2 years
- Proof of stable employment
- Proof of adequate assets/reserves with bank statements
- No bankruptcies within the last 2-4 years
Paying PMI on a Conventional Loan
Keep in mind, before you refinance with a conventional loan, you may pay PMI or Private Mortgage Insurance. If you borrow more than 80% of the home’s value, you’ll owe the insurance. The difference is that it automatically cancels once you owe less than 78% of the home’s value. If you took out your FHA loan after June 3, 2013, you lost that benefit, but can have it with a conventional loan. Make sure you keep that in the back of your mind when you consider if the refinance makes sense.
How the Streamline FHA Loan can Help
Even though you cannot remove MIP with the Streamline FHA loan, it can help in other ways. First and foremost, it should save you money. Lenders are not supposed to let the loan through if there is not a net tangible benefit. In other words, they want to see that the loan makes sense. Either you save money or you refinance from a risky ARM loan. Either way, you and the FHA are at a lower risk of default.
The FHA Streamline loan can allow you to take advantage of lower rates. If you can save money, you can do one of two things:
- Pay your loan without worry each month since the payment decreased
- Make higher payments towards the principal and pay the loan off faster
The choice is yours, but paying the principal down faster decreases the amount of interest and MIP you pay in the end.
So whether you should use the Streamline FHA loan to remove MIP is a personal decision. It won’t directly remove the mortgage insurance premium from your loan. You will still pay it and in fact, pay another upfront mortgage insurance premium. However, if the loan makes more sense if the interest rate is lower, it could help you in the end. If you have the option to refinance into a conventional loan, you have another option.
Weigh the pros and cons of each and be honest with yourself about what you can afford. Don’t get in over your head in payments that will have you sweating it out in the future. You can always pay more towards the principal, no matter which type of loan you have. Either way, this will help you eliminate MIP once you pay the loan off for good.