MIP, Mortgage Insurance Premium
It is insurance from FHA to the lender against incurring a loss on account of the borrower's default. Paid if FHA loan LTV is higher than 80%. Also known as FHA Mortgage Insurance.
By insuring the loan the Federal Government agrees to repay the lender for all money lost by the lender in case the property is foreclosed on. Because the MIP is charged, the FHA can allow a borrower to reduce their initial out of pocket cash expenditure from 5% to 3% of the property purchase price.
When issuing guarantee for a new loan, FHA charges a 2.25% up front Mortgage Insurance Premium (or as little as 2% for a first time home buyer) that can be financed in the mortgage amount or paid in cash (no premium is required for condominiums).
In addition, FHA mortgage insurance requires an annual fee of up to 0.5 percent of the current loan amount, paid in monthly installments. The lower the down payment, the more years the fee must be paid.