What is mortgage insurance premium (MIP)?
Mortgage insurance premium (MIP) is a type of insurance that protects the lender in case you default on your mortgage. MIP is required for FHA loans, which are insured by the Federal Housing Administration (FHA).
How much does MIP cost?
The cost of MIP varies depending on the size of your loan and your down payment. For loans with a down payment of less than 10%, MIP is 1.75% of the loan amount and is paid monthly. For loans with a down payment of 10% or more, MIP is 1.75% of the loan amount and is paid upfront at closing.
Can I get rid of MIP?
Yes, you can get rid of MIP once you have 20% equity in your home. You can also get rid of MIP if you refinance your mortgage into a conventional loan.
Why do I need MIP?
FHA loans are insured by the government, which means that the government backs the loan if the borrower defaults. However, the government does not want to lose money on these loans, so it requires borrowers to pay MIP. MIP helps to offset the risk of default and helps to keep FHA loans affordable for borrowers with less-than-perfect credit or who don't have a large down payment.
What are the benefits of FHA financing?
FHA financing offers several benefits, including:
- Lower down payment: FHA loans allow borrowers to purchase homes with a down payment as low as 3.5%.
- Less-than-perfect credit: FHA loans are available to borrowers with credit scores as low as 580.
- Flexible income and debt-to-income ratios: FHA loans have more flexible income and debt-to-income ratios than conventional loans.
What are the drawbacks of FHA financing?
FHA loans also have some drawbacks, including:
- Mortgage insurance: FHA loans require borrowers to pay mortgage insurance premiums (MIP). MIP is typically 1.75% of the loan amount and is paid monthly. However, MIP can be canceled once you have 20% equity in your home.
- Property requirements: FHA loans have strict property requirements. Homes must be in good condition and meet FHA standards.
- Borrower limits: FHA loans have borrower limits that vary by county.
If you are considering buying a home and you don't have a large down payment or perfect credit, FHA financing may be a good option for you. However, it is important to understand the benefits and drawbacks of FHA financing before you decide if it is right for you.
Here are some additional tips for borrowers who are considering an FHA loan:
- Get pre-approved for a loan before you start shopping for a home. This will give you an idea of how much you can afford and will make the home buying process go more smoothly.
- Compare rates and terms from multiple lenders. FHA loans can vary widely in terms of cost, so it is important to shop around to get the best deal.
- Be prepared to pay a mortgage insurance premium (MIP). MIP is typically 1.75% of the loan amount and is paid monthly.
- Make sure the home you are buying meets FHA property requirements. Homes must be in good condition and meet FHA standards.
If you are considering an FHA loan, be sure to work with a qualified mortgage lender like Tried & True Home Lons who can help you understand your options and find the right loan for your needs.