A borrower needs to pay mortgage insurance premium (MIP), if he buys home with an FHA mortgage and puts down less than 20% of the purchase price. But is it possible to avoid paying MIP, even though you’re making less than 20% down payment?

Well, one of the posters in MortgageFit forums has a similar query. He intends to make a down payment of 3.5%-5% on an FHA loan to buy a home for $320,000. But he says the house is appraised by the lender at $410,000. He asks:

Can he remove the MIP since there’s enough equity in the home?

FHA requires a borrower to pay an upfront mortgage insurance premium of 1.75% and an annual premium of 0.55%, if he makes less than 20% down payment. The MIP can be canceled when the loan-to-value (LTV) ratio of the property reaches 78% of the original home value. However, the payment of MIP for the first 5 years is mandatory for FHA loans with terms of more than 15 years. Thus, if the poster is going for, say, a 30 year FHA mortgage, he’ll not be able to remove the MIP within the first 5 years, even though the LTV is 78% or lower.
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There has been a forum discussion where a poster has asked if he can qualify for an FHA-insured loan as he is self employed. The loan officer, he talked to, said he would not qualify for the FHA loan unless he does a Statement of Income and shows considerable amount of money in the bank. Alternatively, he can also have a co-signer to qualify for the loan. The poster currently lives in a 3-family home and wishes to use the rental income to qualify for the new loan. His questions are:

1. Can he qualify for a FHA loan even though he is self-employed?
2. Can he use the rental income to qualify for the mortgage?
3. Does he really need to have a co-signer?

Self-employment does not disqualify the poster for an FHA-insured mortgage. He does not need to have a permanent job to get approved for the loan. The poster has a credit score of 720. So, in terms of credit he does qualify. But he needs to show that he has been self-employed for at least the past 2 years and has a stable income to afford the mortgage payments.

What are FHA guidelines regarding self-employed borrowers?

As per FHA rules, a borrower is considered to be self-employed if he owns 25% or more of a business. To qualify, he needs to provide the following documents:

1. Individual tax returns, including all applicable schedules, for the recent 2 years.
2. Federal business income tax returns, with required schedules, for last 2 years.
3. A year to date profit and loss statement and balance sheet.
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