How To Avoid Or Lower Your FHA Mortgage Insurance
There’s no way to completely avoid paying MIP when you take out an FHA loan. However, there are a few ways that you can lower what you pay or stop paying a few years into your loan.
Repeat or first-time home buyers can use a down payment of at least 10% to remove their FHA MIP after 11 years or choose a different type of loan to completely avoid this type of insurance. Homeowners can decide to refinance and change their FHA loan into a conventional mortgage to cancel their MIP payments.
Let’s take a closer look at each of these three methods so you can best decide what type of loan program would work best for you.
1. Save For A Larger Down Payment
The easiest way to lower your MIP expenses with an FHA loan is to save more for a down payment. If you’re able to bring at least 10% to the closing table, you’ll qualify for a lower annual MIP payment. You’ll also lower the amount that you borrow, which results in a lower upfront premium. Plus, you can stop paying for MIP in 11 years if you have a 10% down payment.
2. Refinance To A Conventional Loan
Many homeowners refinance to a conventional loan when they reach 20% equity in their home. When you have a conventional loan, you don’t pay MIP. Instead, your lender might require you to pay PMI – but only if you have less than 20% down. You can stop paying MIP without switching to PMI by refinancing once you’ve reached 20% equity.
To refinance to a conventional loan, you must meet your lender’s minimum requirements. Conventional loan requirements are stricter than FHA loan requirements, so you might need to take some time to build a better borrower profile before you refinance. To qualify for a conventional loan, you’ll need to consider the following components:
Credit Score
You must have a median FICO® Score of at least 620 to qualify for a conventional loan with most mortgage lenders, including Rocket Mortgage®. Making your credit card and loan payments on time and limiting your spending can help you increase your credit score while you build equity.
Debt-To-Income Ratio (DTI)
You must have a debt-to-income ratio (DTI) of 50% or less to qualify for a conventional loan. You can decrease your DTI by increasing your household income, paying down your debts or adding a co-signer with a lower DTI to the mortgage loan.
Home Equity
You should have at least 20% equity in your home before you refinance from an FHA loan to a conventional loan. If you refinance before you have 20% equity, you’ll need to pay for PMI instead of MIP. PMI is more expensive than MIP, so be sure you have the right amount of equity before you refinance.
If you aren’t sure how much equity you currently have, contact your lender.
3. Choose A Different Government Loan Type
If you really want to avoid MIP payments, you may want to consider another type of government loan or non-conforming loan. We’ve broken down these options for you below:
USDA Loan
You may be buying a home in a rural area and have a median FICO® Score of 640 or higher. In that case, why not consider a U.S. Department of Agriculture (USDA) loan? Unlike an FHA loan, USDA loans don’t require a down payment. You also don’t need to pay PMI or MIP with a USDA loan. Instead, you pay a monthly guarantee fee that’s less expensive than the FHA monthly premium.
Rocket Mortgage doesn't offer USDA loans at this time.
VA Loan
You might want to consider a VA loan if you’re a current or former member of the armed forces or a qualifying spouse. The Department of Veterans Affairs (VA) has no minimum credit requirement, but most lenders do. To qualify for a VA loan with Rocket Mortgage, you’ll need a minimum median FICO® credit score of 580. There’s no down payment requirement for a VA loan.
You also don’t have to pay any type of monthly mortgage insurance on a VA loan. Instead, you’ll pay a one-time VA funding fee along with your other closing costs – and the home must be your primary residence.
Veterans receiving VA disability benefits and surviving spouses of veterans who passed in the line of duty or as a result of a service-connected disability are exempt from the funding fee.
