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An older neighbor recently passed along a story of a surprise payment from the government stemming from a Federal Housing Administration home loan he took out years ago.

The U.S. Department of Housing and Urban Development, which oversees all FHA loans, has increased its efforts to locate approximately 248,000 homeowners owed $175 million in FHA mortgage insurance refunds.

However, some homeowners could not be found – usually because they had moved and the new mailing address was not in HUD’s records.

When homeowners pay off their FHA-insured loan within five years, a portion of the mortgage insurance upfront premium is returned. It works much like a homeowner’s fire insurance policy that’s canceled before the term expires. If you pay $600 to insure your home for a year and move after eight months, a portion of the $600 would be refunded.

While HUD’s Web site for and toll-free line (1-800-697-6967) have helped ease the load, many consumers are still unaware they have a check coming.

If you believe you are due a refund, try to dig out your old FHA loan number and then check online or by phone. Your proper name may not be enough – especially if it is common, like Sanchez or Smith. Here are the two main possibilities:

Premium Refund: You may be eligible for a refund of a portion of the insurance premium if you:

1. Acquired your loan after September 1, 1983
2. Paid an up-front mortgage insurance premium at closing
3. Did not default on your mortgage payments

Distributive Share: You may be eligible for a share of any excess earnings from the Mutual Mortgage Insurance Fund if you:

1. Originated your loan before September 1, 1983
2. Paid on your loan for more than seven years
3. Had your FHA insurance terminated before November 5, 1990

Lenders require mortgage insurance when borrowers apply for more than 80 percent of the purchase price of the home. It insures the investor (lender) in case the borrower defaults on loan payments. So, if you sold your home and the new owner assumed the loan, you are not eligible for a refund. That’s because there is still a risk of default. The insurance follows the loan and not the initial borrower.

On older FHA loans, mortgage insurance was part of the deal and had to be paid regardless of the equity position of the borrower. Mortgage insurance on newer FHA loans – those placed after Jan. 1, 2001 – mortgage insurance can be dropped when equity reaches 22 percent of the original appraised value and the borrower meets other guidelines.

This history of FHA refunds is interesting. And, before the Internet and toll-free numbers, service speed was often glacial. Years ago, borrowers were permitted to make monthly mortgage-insurance payments. The money from a large group of loans was pooled into a fund similar to a mutual fund. The fund was reviewed each year. If there was more interest earned on the investment than was used up by foreclosures that the insurance covered, then a dividend was declared. Each loan holder in that particular fund was due a share, called a “distributive share.”

It was this distributive share program that Congress suspended in 1990. The decision came on the heels of a Price Waterhouse study that found the fund was unsound and faced continuing losses unless modified. So, the National Affordable Housing Act basically stated that all monthly payments were out the window (similar to “term” life insurance) and that only borrowers who prepaid the premium were eligible for a refund.

Some years, there were no refunds at all because defaults ate up the earnings. Other times, the amount of the share was substantial, with borrowers receiving $700-$900 depending upon the number of defaults in a particular fund.

The refund was payable when a house was sold and the FHA-insured loan was paid off and terminated (not assumed by another party). Lenders were required to notify HUD that the loan was paid off, and inform borrowers on how to file a refund claim.

Sometimes the refund process was overlooked and borrowers had to file their own claims. For years, the government made little or no attempt to notify eligible homeowners that a refund was due them. As a result, many refunds were not paid.

If there was a FHA loan in your past, there may be a refund in your immediate future. Take the time to check it out.

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