Mortgage Insurance Premium (MIP) is a type of mortgage insurance that is required for homeowners who take out loans backed by the Federal Housing Administration (FHA) . The purpose of MIP is to protect FHA-backed lenders against higher-risk borrowers. Since FHA loans come with a down payment as low as 3.5% with a credit score as low as 580, default is a key concern. Conversely, conventional loans only need private mortgage insurance (PMI) policies if the down payment amount is less than 20% of the propertys purchase price.
Each FHA loan requires both an upfront premium of 1.75% of the loan amount and an annual premium of 0.15% to 0.75% . Payment of upfront premiums is at the loan issuance. An additional insurance premium is calculated into the monthly payment on an FHA loan and is calculated based on a percentage amount of the annual premium charged at closing. This monthly fee is held in an escrow account with the Department of Housing and Urban Development (HUD) in the debtor’s name.
Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to. If you opt for a conventional loan and put less than 20% down on your home, mortgage insurance is an extra expense you should plan to pay.
