Qualified Mortgage Insurance Premium

DEFINITION of 'Qualified Mortgage Insurance Premium'

Qualified mortgage insurance premiums (MIPs) are paid by homeowners who take out Federal Housing Administration (FHA) loans. Until the 2017 Tax Cut and Jobs Act, qualified mortgage insurance premiums could be deducted in addition to allowable mortgage interest.

BREAKING DOWN 'Qualified Mortgage Insurance Premium'

Qualified mortgage insurance premiums are a tool used by FHA mortgage lenders to protect themselves against higher-risk borrowers, since FHA loans can be had with a down payment of as little as 3.5% and with a credit score as low as 500. Unlike conventional loans, where lenders require borrowers to pay for a mortgage insurance policy only if the amount of the down payment is less than 20% of the purchase price of the property, FHA mortgages require every borrower to pay MIPs.

Each loan requires both an upfront premium of 1.75% of the loan amount, paid when the loan is issued, and an annual premium of 0.45% to 1.05%, depending on the term of the loan, the size of the loan and the loan-to-value ratio. The annual premium is divided into monthly payments and added to the loan payment. For loans where the borrower puts down 10% or more, the monthly premiums can be canceled after 11 years; for the rest, they last the full term of the loan. 

Borrowers who can qualify for a conventional loan, even with mortgage insurance, should look at both types to see which will be the better deal. Those with lower credit scores may do better with an FHA mortgage, though, especially if they have enough to put down 10%.

Qualified Mortgage Insurance Premiums and Taxes

Every year, your lender is required to send both you and the IRS a copy of Form 1098, the mortgage interest statement. This form lists home-related payments over the past year that can affect your income taxes, including mortgage interest received by the lender, property taxes paid by the lender on your behalf and mortgage insurance premiums you've paid. The total amount of the insurance premiums will be in box 4 of the form.

The mortgage-insurance deduction was available for both for private mortgage insurance (PMI) on conventional loans and mortgage insurance premiums on FHA loans. To claim a deduction for either type of mortgage insurance, you must itemize your deductions using schedule A. There's a space to enter the amount in the "interest you paid" section of schedule A.

The deduction for these premiums expired on Dec. 31, 2017, thanks to the passage of the Tax Cuts and Jobs Act. However, when President Trump signed the Bipartisan Budget Act of 2018, it included more than 30 tax extensions retroactive to 2017. Mortgage insurance premiums were one of them. Whether the deduction will be available for 2018 taxes remains to be seen. Congress would need to act to reauthorize it. For now, mortgage insurance premium payments are not deductible.

But even when they were legal, not everyone could take them. The deduction for qualified mortgage insurance premiums phased out quickly if the borrower's adjusted gross income (AGI) was more than $100,000. The deduction was reduced by 10% for every $1,000 of adjusted gross income over $100,000. If their adjusted gross income was over $109,000, borrowers could not claim the deduction at all. If their filing status was "married, filing separately," the reduction started at an adjusted gross income of $50,000, with the deduction reduced by 10% for every $500 over the limit. It disappeared with AGIs above $54,500.

As noted earlier, to take the deduction, the borrower has to file Schedule A, itemizing their deductions. With the standard deduction nearly doubling for tax years 2018-2025 – and the state and local tax (SALT) deduction dropping to a limit of $10,000 – far fewer people are expected to itemize their taxes. The Tax Policy Center estimates that just over 10% of taxpayers will elect to itemize under the new law; according to IRS data, the figure up to now has been around 30%. 

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