FHA Loans - What Is a MIP?

FHA loans require a mortgage insurance premium, or MIP, to be paid. FHA loans insures for lenders in the case of default. Typically, lenders require private mortgage insurance, or PMI, when borrowers invest less than 20% down payment. FHA loans require a 3.5% down payment investment amount and therefore charge MIP on all loans. The MIP amount is based on a percentage of the remaining debt on a mortgage, so as the mortgage is paid down, the MIP will decrease.

The length and amount a borrower must pay depends on credit scores and LTV amounts. For loans made before July 1991, the MIP must be paid the entire loan term. For loans made after July 1991 but before July 2001, the total number of years the MIP is required was determined at closing, based on how much of a down payment was made. For loans after this point, MIP must be paid for at least the first five years of the term. 

MIP is designed to cover the cost of the loans that do not get paid, because there are some people who will not make their mortgage payments. The costs collected by the government are kept in a fund that continues to provide lending proceeds for other borrowers and pay HUD employees.

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