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Why is There MIP On Gov’t Loans?

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Posted On: 04/08/2015

QUESTION:

An FHA mortgage is a government loan. I thought the government was going to help the homebuyer and homeowners to make affordable monthly payments? What’s up with the MIP? This is absolutely a big rip-off for the buyer and homeowners.

ANSWER:

The FHA program has been around for a long time, and as a result it naturally raises various questions. Let’s respond to your points:

An FHA mortgage is a government loan. The FHA program began in the 1930s and has been used roughly 40 million times since, often by first-time buyers. However, it’s not a loan program because the loans actually come from the private sector; instead the FHA program is a form of mortgage insurance. Borrowers today pay an up-front mortgage insurance premium, usually 1.75 percent, and an annual mortgage insurance premium, typically .85 percent.

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What do borrowers get in exchange for paying insurance premiums? Three benefits: First, they can purchase with 3.5 percent down instead of the 20 percent lenders typically want without insurance. Second, in the event of foreclosure, the FHA pays off the lender. Third, to be backed by the FHA a loan must meet certain standards meaning no prepayment fees or gotcha’ clauses.

I thought the government was going to help the homebuyer and homeowners out there to make affordable monthly payments?

In January the annual MIP for most FHA borrowers was lowered from 1.35 percent to .85 percent, a .50 percent decrease. This is essentially the same thing as reducing the interest rate by half a percent.

What’s up with MIP?

The MIP funds collected from borrowers are placed in a reserve account and used to pay off lender claims. Premium levels have been high in recent years because the FHA had massive losses associated with loans insured between 2000 and 2009. In the past few years the program has been profitable, the reserve account has been bulked up and so it has become possible to lower the annual MIP.

Also, the FHA has a Streamline program that allows borrowers to cheaply refinance. Basically, your current FHA loan must be outstanding 210 days and you must have a good payment history. There is typically no appraisal, income verification or credit review. Speak with lenders for specifics.

This is absolutely a big rip-off for the buyer and homeowners.

FHA insurance is one of several low-down-payment options available to mortgage borrowers. If you don’t like the FHA program then consider loans backed with private mortgage insurance, VA financing for qualified borrowers, or loans that lenders self-insure – you pay a higher interest rate but there are no insurance premiums. To see which is best in your situation look at the monthly costs and up-front fees associated with each loan alternative.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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