Dear Dr. Don,
Due to a less-than-perfect credit score (685), I got an FHA loan at 5.5 percent on a $950,000 house. I will pay $222,000 as a down payment, so the loan will be just under the FHA maximum of $728,000. The lender asked for $302 per month for mortgage insurance premiums.
Here are my questions about the loan:
- Why do I have to pay this MIP if the loan-to-value equals 0.77?
- Is the MIP tax deductible, even if my annual income is more than $175,000?
- How long do I need to pay the MIP?
— Ali Abide
The good news was that you were able to put down enough money to qualify for an FHA loan at a great interest rate. FHA loan limits vary by region and by the type of residence being financed. Readers looking to find the loan limits in their area can use the “FHA Mortgage Limits” work sheet on the Department of Housing and Urban Development’s Web site.
HUD’s “Mortgagee Letter 2009-07,” available as a download on the FHA Mortgage Limits page, explains how loan limits have been increased for the 2009 calendar year under the Economic Stimulus Act of 2008, the Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009. Your loan of $728,000 is, as you said, just under the $729,750 available for high-cost areas in the continental United States in 2009.
The bad news concerns the costs you’ll bear for mortgage insurance premiums, or MIP, on your loan. With a FICO score of 685 and a loan-to-value of less than 95 percent, the MIP is scheduled to be an upfront payment of 1.75 percent and an annual premium of 0.50 percent. That’s $303 a month when spread over the 12 months, or about what your lender quoted you for the monthly mortgage insurance premium.
The fact that your LTV is below the level where the annual mortgage insurance premium is canceled doesn’t cancel your obligation. That’s because the loan has to have a five-year payment history as well as a loan to value of 78 percent or less before you can cancel the annual mortgage insurance premium.
The LTV is based on the lower of the sales price or appraised value at loan origination and not the appraised value at some point in the future. So you need to pay the annual MIP for five years.
The deductibility of mortgage insurance premiums has been extended out through Jan. 1, 2011, but the deduction phases out for high-income earners. Because the deductibility is based on adjusted gross income, or AGI, and not annual income, I can’t say with certainty that your AGI is too high to deduct the premium. However, that is likely to be the case, since in 2008 the AGI limit to be eligible to deduct mortgage insurance premiums was $109,000 ($54,500 if married filing separately).
I’m handicapping this from the sidelines, but the way I see it, you were able to get a jumbo-sized loan at 5.5 percent with a less-than-stellar credit rating by getting an FHA mortgage. Avoiding the mortgage insurance premiums that come along with the FHA loan just isn’t going to happen.
Read more Dr. Don columns for additional personal finance advice.