FHA Mortgage Insurance Premium (MIP) Calculation

  by Amy Avery, Director of Compliance

With the recent changes in the mortgage industry, and expanding FHASecure eligibility criteria, more lenders are turning to FHA loans to boost business.  Questions concerning the Mortgage Insurance Premium calculation are common.  Investors such as GMAC have cracked down on FHA loans where the Conventional PMI calculation has been used instead of the appropriate FHA MIP calculation.  They will not purchase loans with Federal Truth-in-Lending Disclosure Statement payment streams that do not meet FHA standards.

For Conventional loans, the monthly PMI amount is easy to calculate.  The loan amount is multiplied by the rate percent, and then divided by 12 to get the monthly payment.  This is not the case with FHA loans.  The Annual MIP is calculated for each year by taking the average of the 12 balances for that year (without the Upfront MIP amount) and multiplying it by the rate percent (currently 0.50% or 0.25%).  This amount is then divided by 12 for the monthly MIP payment.  This means that the TILA disclosure shows a series of 12 payments at each MIP amount on the payment schedule, even for Fixed Rate loans.  For Adjustable Rate loans, the potential rate changes are not taken into affect when calculating the annual average outstanding balance for each year.

The MIP drops off once the loan reaches 78% LTV, and again the Upfront MIP amount is left out for this calculation.  A common question is how to set the LTV for FHA Streamline Refinances, since a new appraisal is not required.  The LTV on those loans is based on data in FHA's Single Family Insurance System (SFIS) for the mortgage being refinanced.  The new loan amount, excluding the Upfront MIP, is divided by the lower of the sales price or appraised value amount in SFIS.  If a computed loan-to-value ratio is not possible, due to missing data or previous refinancing without an appraisal, the new LTV will default to 89.99%.  A minimum of five years of MIP must be paid on loans with terms over 15 years before the MIP payments are no longer required. 

HUD has given final notice regarding its move to risk-based premiums.  The decision credit score and starting LTV will be used to determine the Upfront MIP, which will range from 1.25% to 2.25%, as well as the Annual MIP rate.  This will lower upfront premiums for higher credit score borrowers, and increase them for those with lower credit scores.  These changes are effective for FHA loans for which case numbers are assigned on and after July 14, 2008.  By moving to risk based premiums, HUD believes FHA will be able to serve a range of borrowers and help ensure the financial soundness of their programs.