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I'm closing on a house in a few days with an FHA loan that has a hefty mortgage insurance. As I understand it, once I reach 78% loan-to-value of the initial sales price or appraised value of the home (whichever is lower), and after 5 years, I can drop the monthly mortgage insurance premiums (since the loan also includes an upfront mortgage insurance premium).

So with the goal of achieving that as soon as possible, it occurred to me that I could have the seller increase the sale price by the amount of the closing costs, and throw in a concession for seller to pay that amount on closing costs. If I do that, the initial sales price will be greater (but still under the recently appraised value--we're getting a good deal). So my LTV will start out lower, and I think that means with the same payments I can reach 78% LTV faster.

Is that sound, or is my logic flawed?

  • See JoeTaxpayer's answer to this question and the comments thereafter for the rules regarding dropping mortgage insurance. – Dilip Sarwate Mar 12 '13 at 19:55
  • That seems to confirm what I'm thinking. – Hilton Campbell Mar 12 '13 at 20:42
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Nope that will not work. You need to be at 80% of the appraised value. Sale price has nothing to do with it at all.

When I bought in 1998 with 5% down, I only had a reappraisal done in three years. The housing market was rising, and though I had only paid another $1500 to the principal, the house appraised for $25,000 more than when I bought it so it was no problem getting rid of it.

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