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FHA MIP Policy Before and After September 1983

Prior to September 1983, FHA charged Y2% additional fee as a mortgage insurance premium to cover foreclosure losses associated with FHA mortgages. This premium was based on the assumption that the average FHA loan would remain in force for 12 years. In the instances where homeowners FHA loans actually stayed in force more than 12 years, the owner of the FHA mortgage could apply for a refund for the premiums paid in excess of 12 years, once the FHA mortgage was paid off or retired. If the insurance pool in which the loan was placed had a profitable experience and the premiums were paid in excess of 12 years a  re- fund was paid, if the FHA homeowner knew to request the refund, few did so. The National Affordable Housing Act of 1990 ended the policy of paying "distributive funds" as refunds on mortgages made before September 1983.


For FHA loans made after September 1983, FHA began collecting an upfront mortgage insurance  premium, which again was based on the assumption that the average FHA loan would stay alive for 12 years. In this case, they built in an automatic refund policy for the FHA loans, which were paid off in less than 12 years. The reasoning for the refund was simple. The homeowner paid or financed a 12-year upfront insurance premium but did not use the ful112 years. Therefore, the unused portion of the upfront insurance premium  was owed to the homeowner. This refund is payable to the person or persons that own the property insured by FHA at the time the loan is paid off. Therefore, if an FHA loan is assumed, the party assuming the loan would be entitled to any refund when the loan is paid off, not the original owner. This refund is automatic in that the lender with the FHA loan being retired is required to notify FHA of the payoff, which in turn would cause FHA to issue a refund. To insure a speedy refund, the homeowner can follow up and make sure that their lender has forwarded HUD form 2344 to FHA with the proper payoff information.

Joe and Mary Prospect obtained a $90,000 FHA loan on January 1, 1990, and they financed the  FHA mortgage insurance premium of $3,4,20. The total FHA loan was $93,420. One year later they were transferred by Joe's employer. If the house was sold and the loan paid off on January 1, 1991, Joe and Mary would be entitled to approximately 11/12ths of the 12-year premium that they paid in advance. The actual refund from FHA's refund table  shows  a refund due of $3,204.30. This amount would be forwarded to the Prospects  30-120  days  after  loan  closing.  The  check  would  come  directly  from  FHA  in Washington D.C.

If the Prospects needed the FHA refund of $3,204.30 to purchase another house with a closing date before they would actually receive their refund, it would be legal to borrow up to $3,204.30 against the refund, which is considered an asset. After loan payoff, a finance company might be willing to loan the Prospect's money against the FHA refund as collateral.

In the event that the Prospects sold their house on a loan assumption, the buyer's assuming the loan would also assume the MIP account. The Prospect?s FHA loan would not be paid off and no MIP refund would be due until the FHA loan is retired. If the Smiths assume the Prospect?s FHA loan and pay it off before the loan is 12 years old they would be entitled to a refund, even though the Prospects paid the MIP premium fact, the Smiths could elect to refinance the FHA loan to a conventional loan, if they did so, they would be entitled to the $3,204 refund!


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