FHA MIP -- What is it ?

How can it Affect my Purchase of Real Estate

     FHA MIP is Federal Housing Authority or FHA "mortgage Insurance Premium" or MIP. It is required when you use an "FHA insured" mortgage to buy a Sarasota area home.   You normally use an FHA mortgage if you can't afford to make the 20% down payment, normally required on a "conventional" bank mortgage.  As an example and ignoring all the other incidental costs involved, if you were to buy a home priced at $100,000, to get a "conventional mortgage," you would generally be required to make a $20,000, (or 20%) down payment, leaving an $80,000 mortgage.

     Because you can't afford to make such a large down payment, the U.S. government which wants to encourage home ownership, essentially guarantees repayment of "FHA" home mortgages with down payments of as little as 3 to 5%.  This allows banks to provide home mortgages to people, with otherwise good credit, so they can buy that Sarasota real estate property in the example above when they have only $3,000 to $5,000 rather than $20,000 for a down payment.

     Not everyone who buys a home with an FHA mortgage pays their bills.   So, to cover the cost of the mortgages that do not get paid off by their buyers, FHA charges you and everyone else with an FHA mortgage a small insurance premium, (called the MIP).   Together, all those MIP insurance payments cover the cost of repossessing and reselling, often at a loss, homes covered by defaulted FHA mortgages.

     But "for how long do we have to pay that MIP premium" gets a little confusing.  Here's how it works.

     If your FHA mortgage loan was made before July, 1991, you must pay the MIP for the life of your mortgage, normally the full 30 years.  The MIP is a percentage of the remaining debt, so it will become less as the principle is paid down.

     For FHA loans after July, 1991 but before 2001, the number of years for carrying the MIP was set at closing depending upon the size of the down payment.

     For FHA mortgages starting in 2001, MIP must be carried for the first 5 years no matter what.  But, after that, it will be dropped when your equity (or, the percentage of the home's current value that you own by making mortgage payments or by increases in the value of the home), reaches 22% of the value of the home when you bought it.)

     Here's an interesting twist.  It is possible, if you've owned your home for a while and had a HUD/FHA mortgage, you may be owed a refund on your MIP insurance.  You can check this at The HUD Refund Website

     Yes, it is confusing, but that is one more reason why when you think about buying a Sarasota real estate property, you need a Sarasota Realtor to explain the many ways to finance it.