NEW RULES FOR THE ELIMINATION OF
Loan guidelines continue to be revised. With the
re-introduction of 97% conventional loan financing, the rules surrounding
Private Mortgage Insurance (PMI) and when it can be eliminated have also changed.
Any home loan with less than 20% down payment typically requires Private
Mortgage Insurance because of the added risk associated with high Loan-to-Value
(LTV) ratio loans. In all cases, today’s lenders are required to provide
better disclosure regarding PMI coverage and how it might be eliminated in the
The basic rules are contained in the Homeowner's
Protection Act of 1998 which became effective July 29, 1999. The Act provides
borrowers certain rights when Private Mortgage Insurance is required as a
condition for obtaining certain residential mortgages. The current rules for
conventional loans only include:
- PMI must be canceled upon the
borrower's request, under certain circumstances.
- PMI must be terminated automatically under certain circumstances.
- A borrower is entitled to receive notice of the right to cancel PMI, both at
the consummation of the loan transaction and annually thereafter.
- Borrowers opting for lender-paid mortgage insurance programs must be
provided sufficient disclosures.
A new portion of the regulation addresses loans sold to
an “institutional third party”, usually Fannie Mae, Freddie Mac or Ginnie Mae. The language in the regulation suggests that
upon said sale of the loan, the right to PMI cancellation reverts to the rules
of the Third Party Institution. The information below accommodates the third
party institutional rules that amends the general rule and now incorporates two
sets of criteria for determining eligibility for the expunging of PMI depending
upon whether the cancellation is based upon the original purchase value of the
current market value.
Lender initiated based upon the original property value
(automatic termination), the following applies:
the loan balance equals
or is less than 78% of the original property value.
the property value is
confirmed by the servicer, most likely via a new appraisal, conducted by a
lender approved appraiser.
payment history must be current and without any past due payments (late payments)
within the past 12 months preceding the request for PMI cancellation.
termination is initiated by the borrower based upon the original property
value, the loan balance need be only 80% of the original property value.
Borrower initiated termination based upon the current
property value, the following applies: (this most often results from
appreciation, borrower improvements or an appraised value exceeding he purchase
the loan balance equals
a minimum of 80% of the current property value and the loan has been in
existence a minimum of 5 years.
the loan balance equals
a minimum of 75% of the current property value and the loan has been in
existence a minimum of 2 years but less than 5 years.
If PMI cancellation may be requested in less than a minimum 2
year period from inception of the loan if improvements to the
property is the reason for the increase in value.
a new appraisal is obtained,
conducted by a lender approved appraiser.
payment history must be current and without any past due payments (late
payments) within the past 12 months preceding the request for PMI cancellation.
Requests to cancel mortgage insurance must be in
writing. Homeowners, in addition to being current on their payments, must have
no subordinate liens against the property. With the past proliferation of
second trust deed and/or equity loan financing, some borrowers could find
themselves ineligible for PMI cancellation. This applies also to those borrowers
who acquired 100% financing using two loans (noted above). Jumbo loans (those
loans that exceed the Fannie Mae/Freddie Mac conforming loan amount of
$484,350) will be eligible for PMI cancellation at the 77% equity position. The
more recent loans in some areas where the conforming loan limit was increased
above the $484,350 amount raises questions that can only be answered by
contacting the lender.
A recent inclusion in the rules is the requirement that
“the current market value be equal to or greater than the original
appraised value at the origination date”. This was implemented as home values
declined following the 2008 recession. At that time, there was concern that
this rule seemed to nullify the potential for many PMI cancellations. As home
values have rebounded, this appears to be of little consequence for current
Again, depending upon the investor, the combination of
factors required to allow expunging the PMI can vary. In the recent past, for instance, some
borrowers were required to retain the PMI coverage for as long as five years,
when they were considered a high risk at the inception of the loan (see
additional info below). Typically, a borrower signs a disclosure when signing
loan documents that identifies the rules governing PMI coverage and its
Automatic cancellation of PMI occurs under most
circumstances when the remaining loan balance reaches 78% of the
original loan achieved via principal pay down, which could take many years.
Thus, borrowers will want to be aware of their equity position and petition
their lender to have their PMI eliminated. The rule applying to
"lender-paid" mortgage insurance refers to those cases where a 95%
loan is acquired, without monthly PMI (loans in which the PMI premium is added
as a part of the interest rate). These Lender Paid Mortgage Insurance (LPMI)
loans now require greater disclosure at the time of acquiring the loan.
With the advent of "credit scoring",
borrowers are "risk rated" in relation to both their ability and willingness
to pay back a mortgage. The lower the credit score, the higher the risk for the
lender in making the loan. "High Risk" mortgages, those made to
borrowers with low credit scores had and may continue to have additional
conditions imposed for the elimination of mortgage insurance. Fannie Mae and
Freddie Mac continually redefine industry guidelines that identify a
The new rules apply only to conventional loans. VA loans
include a Funding Fee which is financed with the mortgage and is then paid
during the life of the loan. FHA loans are more complicated wherein both an
Up-Front Mortgage Insurance premium (UFMIP) and Monthly Mortgage Insurance
Premium (MMI) is administered. USDA loans also have
two mortgage insurance premiums applied.
you think that your present Loan-to-Value might make you eligible to have your
monthly PMI payment eliminated, the first step is to call the lender to whom
you currently make your payments and ask the procedure to follow. You will most
likely be provided a "lender package" to complete as a part of your
request. Additionally, anticipate that the lender is likely to require an
appraisal be performed, by an "approved" appraiser, to prove the
property value. You have nothing to lose by making the inquiry and much to gain
if you discover you are eligible to have your PMI removed. Do not be surprised
if your inquiry regarding the elimination of PMI results in numerous offers to
refinance your loan.