How Does The MIP Work For HUD Multifamily FHA Loans?Paul Winterowd
MIP (Mortgage Insurance Premium) is a unique aspect of HUD/FHA insured multifamily loans. The reason it exists is to support the federal program that underwrites and ultimately guarantees FHA multifamily loans that offer the richest terms in the industry.
MIP is a monthly payment based on the outstanding balance of the loan at the beginning of each year. The year isn’t based on the calendar, rather every 12 months during the life of the loan. The MIP on the 223(f) loan for market rate properties is .60% (60 basis points).
The formula to calculate the monthly MIP for a 223(f) loan is:
(loan balance * .006) /12.
So, if the outstanding loan balance is $1,000,000, the MIP would be $500 each month. (1,000,000 * .006 / 12 = 500). The monthly MIP payment is recalculated each year based on the average loan balance over the previous 12 months.
For the sake of simplicity, some people will add the MIP to the rate to get an “all-in” rate. Technically this in incorrect because the amount of MIP you pay each year decreases. This is because the principal balance of the loan is amortizing thus decreasing a key input in the calculation. When you do the math, this is a savings to the borrower because if the MIP were “built into the rate”, the borrower would be paying more interest which would reduce the velocity of principal pay down in the loan amortization.