How to Cancel PMI on an FHA Loan – When It’s Possible and Steps to Take

FHA loans require mortgage insurance premiums (MIP) to protect lenders, unlike conventional loans that have private mortgage insurance (PMI). MIP is often more expensive over the life of the loan. So can borrowers cancel PMI on an FHA loan?

Unfortunately you can’t cancel MIP on an FHA loan in the same way as PMI on a conventional loan. But there are scenarios where MIP can be removed from an FHA mortgage. This guide covers when it’s possible to eliminate MIP and the process to take.

What is MIP on FHA Loans?

The Federal Housing Administration (FHA) insures lenders against losses on loans they back. Borrowers pay a mortgage insurance premium to the FHA to provide this insurance protection. Rates typically range from 0.45% to 1.05% of the loan amount annually.

On conventional loans, this insurance is called private mortgage insurance (PMI) and goes to private companies instead of the FHA. The insurance protects lenders when borrowers put down less than 20% at purchase.

Key differences between MIP and PMI:

• FHA loans require MIP no matter the down payment – Even a 20% or higher down payment still necessitates paying mortgage insurance premiums.

• PMI can be canceled at 20% equity – On a conventional loan PMI can be terminated when you reach 20% equity through payments or appreciation.

• PMI falls off automatically at 78% LTV – When the loan balance hits 78% of the original value, PMI is automatically removed per federal law.

• MIP has no set cancellation point – FHA insurance premiums don’t have an automatic termination point based on equity like PMI.

When Can MIP Be Removed from an FHA Loan?

Since MIP doesn’t have a set cancellation point, determining if and when it can be eliminated takes looking at multiple factors:

1. When the Loan Originated

FHA guidelines for canceling MIP depend largely on when you got the mortgage:

• Loans from July 1991 to 2001 – No option to cancel MIP. It lasts for the full loan term.

• Loans from 2001 to June 2013 – MIP terminates once 78% LTV is reached and after 5 years of payments.

• Loans after June 2013 – 11 years of payments cancels MIP if a 10% or higher down payment was made.

So loans taken out after 2001 have potential MIP removal options, while earlier loans do not. The timing and down payment amount determine eligibility.

2. Loan Term

Along with origination date, the length of the mortgage term also plays a role:

• 15-year FHA loans – The 5-year waiting period is waived. MIP can cancel at 78% LTV.

• 30-year FHA loans – Must wait 5 years and reach 78% LTV to cancel MIP if originated before June 2013.

So 15-year term FHA loans allow MIP termination a little sooner than 30-year mortgages, provided all other requirements are met.

3. Payment History

• On-time payments – MIP removal requires having no late payments on the FHA loan.

• Missed payments – Any delinquencies disqualify the loan from cancellation of mortgage insurance premiums.

Perfect payment history is mandatory to cancel MIP. Just one 30-day late payment, even years ago, prevents removal. This is stricter than PMI cancellation requirements.

How to Cancel MIP on an Eligible FHA Loan

If you’ve determined your FHA loan meets the requirements for MIP termination, here are the steps to take:

• Contact your mortgage servicer – Ask them to review if your loan qualifies for MIP cancellation based on the origination date, equity, term length, payment history, and other factors.

• Verify the cancellation – Once the servicer removes the MIP per FHA guidelines, check your monthly statements. Make sure the mortgage insurance premium charges have ended.

• Enjoy the savings – With MIP canceled, your monthly payment will go down. Consider putting those savings toward paying extra mortgage principal to build equity faster.

Borrowers aren’t required to take any action on loans eligible for automatic termination. But contacting the servicer when you think you qualify ensures the removal happens on schedule.

Alternatives if FHA MIP Can’t Be Canceled

For FHA mortgages that don’t reach the equity or payment history requirements to cancel MIP, a few options exist:

Refinance to a Conventional Loan

Refinancing into a conventional loan held by Fannie Mae or Freddie Mac provides a fresh start without mortgage insurance. Requirements include:

• At least 20% home equity
• Credit score of 620 or higher

With enough equity built up from your down payment and paying down the loan balance, you can likely qualify for a no PMI conventional refi.

Refinance Using an FHA Streamline

An FHA streamline refinance keeps you in an FHA loan but with today’s lower interest rate and mortgage insurance premiums. You won’t need an appraisal or income verification. While you’ll still have MIP, it may be at a lower cost.

Apply for MIP Reduction

If refinancing isn’t viable, ask your servicer if a reduction in the annual MIP rate is possible. Provided you have 20% equity, a lower mortgage insurance premium might be available to cut your costs.

The Bottom Line

Canceling mortgage insurance premiums on FHA loans is more restrictive than removing PMI from conventional mortgages. But loans originated after 2001 may qualify if all on-time payment and equity requirements are met.

Understanding when MIP can be eliminated for your FHA mortgage requires looking at multiple factors. But it’s worth exploring, as canceling mortgage insurance provides monthly savings that can accelerate your payoff timeline.