Can PMI Be Removed From an FHA Loan?

Getting a mortgage to buy a home is an exciting milestone in life, But the requirement to pay private mortgage insurance (PMI) or mortgage insurance premiums (MIP) on loans with less than 20% down can put a damper on your homeownership joy

This is especially true for borrowers with FHA loans, which have more rigid mortgage insurance rules compared to conventional loans. So a common question for FHA borrowers is: Can I remove PMI from my FHA loan?

The short answer is: Not usually, unless you refinance. But let’s take a deeper look at mortgage insurance on FHA loans, when and how it can be removed, and some smart strategies for minimizing this cost.

What is MIP on FHA Loans?

FHA loans are insured by the Federal Housing Administration. So instead of private mortgage insurance (PMI), FHA borrowers pay mortgage insurance premiums (MIP).

There are two types of MIP on FHA loans:

• Upfront MIP – This is 175% of the loan amount and is paid at closing On a $200,000 loan, it would be $3,500.

• Annual MIP – This is an annual fee charged monthly. It’s usually 0.85% of the loan amount per year. On a $200,000 loan balance, you’d pay about $142 per month.

In contrast, PMI on a conventional loan typically ranges from 0.5-1% of the loan amount per year.

FHA MIP Cancellation Policies

The biggest difference between PMI and FHA MIP relates to when and how it can be removed:

PMI on Conventional Loans:

• Automatically cancels when loan balance reaches 78% loan-to-value (LTV) ratio

• Can request cancellation when balance reaches 80% LTV

MIP on FHA Loans:

• For loans closed before June 2013, MIP cancels at 78% LTV

• For loans after June 2013, MIP is required for the life of the loan unless you originally put down 10% or more

So for most modern FHA loans, MIP cannot be removed until the loan is fully paid off. The only way to remove MIP is to refinance into a conventional loan.

Strategies to Remove MIP on FHA Loans

If you want to get rid of that FHA MIP payment, here are some options:

1. Refinance to a Conventional Loan

This is the most common and straightforward way to remove MIP from an FHA loan. You’ll need to have at least 20% equity in your home to qualify for a no-PMI conventional loan.

Run the numbers to see if potential interest rate savings outweigh closing costs. Shop multiple lenders to get the best offers.

2. Refinance to Another FHA Loan

If you don’t have 20% equity yet, you could refinance to a new FHA loan to take advantage of lower rates or re-set the clock on the 11-year MIP period. Just know you’ll have MIP again, likely for the life of this new loan.

3. Pay Down to 78% LTV

For pre-2013 FHA loans, request MIP cancellation when you reach 78% LTV through extra payments or home value appreciation. Monitor your equity position annually.

4. Make a 10% Downpayment

On a new FHA purchase, putting down 10% instead of 3.5% lowers your MIP rate and allows cancellation after 11 years. Could be worth it if staying long-term.

5. Ask for an Exception

Though rare, some homeowners have had success asking their lender for an MIP cancellation exception if very close to the 78% threshold. Doesn’t hurt to ask!

Tips for Minimizing FHA MIP

If removing MIP isn’t feasible yet, here are some suggestions to minimize the amount you pay:

• Make extra payments to pay down your loan faster
• Recast/re-amortize after prepayments to lower monthly MIP
• Monitor home value and consider requesting appraisal for LTV updates
• Compare mortgage insurance – In some cases, lenders’ PMI may be lower than FHA MIP
• Pay upfront MIP in closing costs instead of financing to save on interest
• Consider conversion program – Some lenders offer conventional conversion option on FHA purchase loans

The bottom line is that removing MIP from an FHA loan is very difficult. But with the right strategy, you can eliminate or reduce this annoying extra mortgage payment. Monitor your equity, shop lenders, and explore your options to maximize savings.

Frequently Asked Questions

Can I cancel PMI on an FHA loan?

No, you cannot cancel PMI on an FHA loan. FHA loans require mortgage insurance premiums (MIP) which typically lasts for the life of the loan.

When can PMI be removed from an FHA loan?

For FHA loans closed after June 2013, MIP cannot be removed except by refinancing or paying off the loan. On older FHA loans, MIP cancels automatically at 78% LTV.

How can I remove PMI from my FHA loan without refinancing?

The only way to remove MIP without refinancing is to have an older FHA loan (pre-2013) and pay down the balance until you reach 78% loan-to-value ratio. Then request MIP cancellation from your lender.

What are my options for getting rid of MIP on an FHA loan?

The options are refinancing to a conventional loan, refinancing to a new FHA loan, paying down to 78% LTV on older loans, making a 10% downpayment, or asking for an exception if very close to 78%.

Is there an advantage to conventional loans over FHA?

The biggest advantage of conventional loans is that PMI can be removed more easily, once you reach 80% LTV. FHA MIP is very difficult to remove for most modern FHA loans.