Under the present FHA mortgage insurance premium (MIP) system which went into effect in September, 1983, FHA mortgage holders are entitled to a mortgage insurance premium refund if they meet the following criteria: (1) They must have financed 100% of the mortgage Insurance premium at the time their FHA loan was made. (2) They must pay the entire FHA mortgage off before the mortgage reaches the 12th anniversary. (3) They must be the legal owner of the property at the time of the mortgage termination.
The reasoning behind the FHA MIP refund is really quite simple. The FHA borrower has added the cost to insure the loan to the loan balance, rather than pay a monthly premium such as Y2% of the mortgage amount each month, as under the FHA MIP system prior to September, 1983. The lender would not make the very low down payment FHA loan if they did not have the mortgage insurance premiums upfront from the lender, instead of having to collect the monthly premiums from the FHA borrower. This allows FHA to have a better cash flow with which to operate their programs.
The mortgage insurance premium is computed on the assumption that the average FHA mortgage will last 12 years. Hence, they collect a 12-year premium in advance. If the FHA borrower refinances the loan or other- wise pays it off by selling before 12 years expires, the FHA borrower is entitled to a refund of the unused insurance premium. For example, if the FHA borrower had financed $3,420 of MIP on a $90,000 mortgage made one year ago and he pays off the loan. He would be entitled to a MIP refund equal to approximately 11/12ths of the total premium paid. The actual dollar amount of the refund in this case would be $3,204.30.
This refund would be returned to the owner of the property at termination of the mortgage~. The refund would be paid by FHA within 120 days of the loan closing. The refund of the MIP could be used for the down payment on another house. It could also be used to payoff some obligations, to help the seller qualify for another house. The refund could also be used to pay real estate commissions. In fact, the seller could borrow against the refund to pay commissions, as the refund becomes an asset as soon as the loan is paid off. The seller can also justify lowering the price of the house in some cases to sell it, once he is aware that he will receive an offsetting refund from FHA.
A word of caution, the seller is not entitled to any refund if he sells the FHA loan on an assumption. This is because the person assuming the loan takes over not only the responsibility to pay the FHA loan, they take over the FHA MIP account ownership as well. Therefore, any FHA MIP refund due is being transferred to the assessor. This is a consideration for the seller when an assumption offer is made. However, the seller could counter an offer and request the buyer to pay a higher price on the assumption to cover all or part of the value of the refund. This is workable as no appraisal is required on the assumption of most FHA mortgages.
Prior to September 1983, FHA mortgage holders were entitled to MIP refunds if they met certain requirements. Unfortunately, few real estate agents were aware of these refunds and did not pass on this information to sellers who had FHA mortgages. As a result over 90% of all FHA borrowers who had refunds due never collected them because the refunds were not automatic then, you had to request a refund. And few did so.
The National Affordable Housing Act of 1990 eliminated refunds paid by the "distributive shares" for FHA loans made prior to September 1983. Therefore, FHA shut the door on refunds for mortgages, which had Y2% monthly premiums made before September 1983. However, on loans made after September 1983, in which a single premium was paid or financed and the loan is paid off before 12 years, FHA will still make refunds.
