MIP, or annual mortgage insurance premium, is charged by FHA to insure the HECM reverse mortgage. Unlike most traditional “forward” mortgages, the HECM is a non-recourse loan. This means the most that will ever have to be repaid is the value of the home, even if the home isn’t worth enough to pay off the entire loan balance. MIP (and IMIP) helps make this possible.
MIP is charged differently than IMIP, but both serve the same purpose. IMIP is a one-time fee paid to FHA at loan closing. MIP is charged on an ongoing basis at an annual rate of 0.50% of the loan balance throughout the life of the loan.
No mortgage payments are required for a HECM reverse mortgage as long as program obligations are met (including the payment of property charges), so MIP is not an out-of-pocket expense. If no mortgage payments are made, it simply accrues onto the loan balance over time along with the interest.
How mortgage insurance premium (MIP) is used
MIP and IMIP 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. In short, 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.