If the Federal Housing Administration backs your mortgage, lenders don't have to worry about losing money if you default. This lets you qualify for a mortgage with a low down payment, possibly as little as 3.5 percent. The catch is the FHA funding fees: the mortgage insurance you have to pay the agency. At the time of writing, the fees include an upfront mortgage insurance premium (UFMIP) equal to around 1.75 percent of the loan amount. You also make smaller annual premium payments over the life of the loan. Both are deductible.
Mortgage Interest Premiums
The IRS specifically lists FHA mortgage insurance fees as a deductible expense. You can take off the premiums you pay over the life of the loan in the year you write the check. The upfront fee is different: you have to allocate it over the life of the loan or seven years, whichever is shorter. If your UFMIP is $3,500, say, you can deduct $500 a year for seven years.
Taking the Write-Off
You can't write off FHA funding fees if you take the standard deduction. Like private mortgage insurance premiums, FHA MIPs are an itemized deduction on Schedule A; if you don't itemize, you can't claim it. You must also meet all the usual IRS requirements for deducting premiums or mortgage interest, detailed in IRS Publication 936. For example, if your adjusted gross income is greater than $100,000 -- $50,000 if you're married, filing separately -- your mortgage-insurance premium deduction goes down. If your AGI is high enough, the write-off disappears.
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