Initial mortgage insurance premium, or IMIP, is a one time fee paid at loan closing that goes to FHA to help insure the HECM reverse mortgage. This protects both borrower and lender in the event the home isn’t worth enough to settle up the entire loan balance.
In short, IMIP helps make the HECM reverse mortgage a non-recourse loan. The most that will ever have to be paid back is the value of the home, even if the home isn’t worth enough to settle the entire loan balance.
FHA periodically changes how IMIP is charged, but as of this writing it equals 2% of the maximum claim amount (which equals the appraised value for most people).
Typically not out of pocket
If the reverse mortgage is on a home you already own (which is the case for most reverse mortgages), you’ll likely be able to roll the IMIP into the new loan balance. If you’re purchasing a home with a HECM (yes, this is possible!), you’ll have to pay the IMIP out of pocket along with your down payment.
How IMIP is used
IMIP (and MIP) are deposited into FHA’s mutual mortgage insurance fund (MMIF). The MMIF is very important for both traditional “forward” FHA and HECM lending. The MMIF makes it possible for lenders to offer traditional FHA loans and HECMs at rates and terms that would be less favorable or impossible without the MMIF. Basically, lenders are more willing to make “riskier” loans at lower rates because they are backstopped by the MMIF.
The funds in the MMIF are used to protect lenders against loss in the following instances:
- A traditional “forward” FHA mortgage borrower defaults and the home is foreclosed at a loss to the lender.
- A reverse mortgage is settled up due to a maturity event and the home isn’t worth enough to pay off the entire loan balance. Again, unlike traditional “forward” FHA loans (or most other “forward” mortgages, for that matter), HECMs are non-recourse. The most that will ever have to be repaid is the value of the home.
The funds in the MMIF essentially make HECM lenders whole if the loan balance ever exceeds the value of the home. This is an important protection for both lenders and borrowers and helps make the HECM possible.