Lately, I have talked to quite a few people who open the conversation with something to the effect of “How Do FHA Loans Work?” I thought I would take some time to explain how FHA loans “work” in a series of posts and highlight some of the differences between FHA loans and other types of loans.
This will be an ongoing “How Do FHA Loans Work” series with random updates.
Today’s installment of “How Do FHA Loans Work?” comes from a conversation I had yesterday who asked me “How does MIP work?”
What is MIP? What is UFMIP? What is MI?
When you take out an FHA loan, you are required to pay what is called an Up Front Mortgage Insurance Premium (UFMIP). Currently, the UFMIP requirement is between 1.5% (FHA Streamlines) and 3% (FHA Secure) of the loan amount (this amount changes from time to time). This money is taken and put into an escrow account at the US Treasury and is proportionately distributed to HUD on a monthly basis in case you default on your loan. This UFMIP does not benefit you as a borrower — it benefits the lender in that it protects the lender against mortgage loss because FHA pays the lender directly if the property is foreclosed and a claim is filed.
In addition to the UFMIP that you will be required to pay when you take out an FHA loan, you will also be required to pay Monthly Mortgage Insurance – commonly referred to as “MI”. Currently this MI is .0055% of your total loan amount broken out on a monthly basis. So for a loan amount of $100,000, the monthly MI would be $100,000 x .0055 /12 or about $46 per month..
MIP is the common reference to the UFMIP account once it is set up – and if you have had an FHA loan in the past, you may actually be entitled to an MIP refund. HUD has done a very nice job of making it easy to find out if you are due an MIP refund by making a search section on their website.
MIP Refund vs MIP Credit
When you participate in the FHA Streamline program, you will be required to set up a new UFMIP account (as always) with your new FHA loan. The nice thing about going from one FHA loan into another FHA loan is that HUD will actually give you a credit for whatever is left in your old MIP account towards setting up your new UFMIP account. So, in other words – if you have $1,500 in your old MIP account and your new UFMIP that is required on your new loan is $$2,000 – HUD will credit you $1,500 toward the $2,000 so you will only be required to pay an additional $500.
An MIP refund is different than an MIP credit – an MIP refund actually comes in the form of a check after you fill out the required paperwork if you are due an MIP refund. Again, it is easy to find out if you are due an MIP refund thanks to the search section on HUD’s website.
{ 4 comments… read them below or add one }
Thanks for explaining the difference between a credit and a refund, I had 3 lenders here in my office today and no one could agree!
Thanks!
Karen
@Karen,
Happy to be of help – with the ever-changing UFMIP requirements, it can be confusing!
Justin
I live in Florida, if they foreclose on my property. will the MIP Insurance pay off the loan, since we had to take the Insurance in order to get the loan?
Also will they come after us, for any money, once the foreclosure is done?
I recently signed a contract with a local realtor, and I told him, I was not sure how close we were to foreclosure, and that we had the MIP ins, on the loan, he was hurridly ready to list my place anyway. Will I owe the realtor any money, by canceling the contract?
thanks,
Bonnie
If you ever want to see a reader’s feedback
, I rate this post for four from five. Detailed info, but I just have to go to that damn google to find the missed bits. Thanks, anyway!
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