NEW RULES FOR THE ELIMINATION OF
PMI
Loan instruments introduced in recent years have made it possible for
today's home buyers to purchase with as little as 3 to 5 percent down payments
or even with no down payment (100% financing). Any home loan with less than 20%
down payment typically requires Private Mortgage Insurance (PMI) because of the
added risk associated with high Loan-to-Value (LTV) ratio loans. This is one of
the reasons that most 100% financing is competed via two loans . . . a first
trust deed for 80% of the purchase price (thereby eliminating the need for PMI)
and a second trust deed for the remaining 20% of the purchase price. In all
cases, today’s lenders are required to provide better disclosure regarding
PMI coverage and how it might be eliminated in the future.
The new 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 new 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.
The general rule has been that PMI must continue for a minimum of two years,
after which, the equity in the home must have reached a minimum of 20% . . .
either via mortgage principal pay down, increased value due to home
improvements (substantiated via a new appraisal), home appreciation or a
combination of the factors. Again, depending upon the investor, the combination
of factors required to allow expunging the PMI could vary. In some cases, a
borrower was required to retain the PMI coverage for as long as five years,
especially if the borrower was 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
eventual elimination.
The rules indicate that a homeowner may cancel PMI when 20% equity is
achieved. Automatic cancellation would occur when a 22% equity position is
achieved. The only way a lender would "know" that the 22% equity
position has been reached is 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 90%
loan is acquired, supposedly without PMI. Most likely, the PMI premium was
added as a part of the interest rate. This situation now requires greater
disclosure at the time of acquiring the loan.
Homeowners have to be current on their payments and have no subordinated
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). Requests to cancel mortgage insurance
will need to be in writing. Jumbo loans (those loans that exceed the Fannie
Mae/Freddie Mac conforming loan amount of $417,000) will be eligible for PMI
cancellation at the 77% equity position. The more recent in some areas where
the conforming loan limit was increased above the $417,000 amount raise
questions that can only be answered by contacting the lender.
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 may have additional conditions imposed
for the elimination of mortgage insurance. Fannie Mae and Freddie Mac
continually redefine industry guidelines that identify a "risky"
borrower.
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. For loans originated after January, 2001,
FHA acquires both a Mortgage Insurance premium (MIP) and Monthly Mortgage
Insurance Premium (MMI). Any unused portion of the MIP of 1.5% on 30 year
mortgages may be refunded within the first 84 months of the loan. This would occur, for instance, in a
refinance of the original FHA loan.
The MMI will continue to be paid until the outstanding principal balance
reaches 78% where upon it will automatically be cancelled. The 78% level must
be reached via principal pay down only and can not include an equity growth.
If 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 you inquiry regarding the elimination of PMI results in numerous offers to
refinance your loan.
Webpage/pmi rules
PMI DEDUCTIBILITY EXTENDED
While in the past, PMI was non-deductible for tax purposes,
there was a one year rule in 2007 allowing PMI to be deductible for that year
only. There is a bit of good news for homeowners who purchased homes in 2007
using this Private Mortgage Insurance allowance. While the original mandate was
only for 2007, Congress has extended the deductibility until January 2010.
Homeowners with adjusted gross incomes below $100,000 are
eligible for a full deduction with a complete phase out of eligibility between
$100,001 and $110,000 income. Translated into purchasing power, a $100,000
income, depending upon the interest rate at the time, will accommodate between
a $650,000 to $700,000 loan amount. Whether many high
loan balance borrowers will find this helpful remains to be seen.
The PMI rules above still prevail in most situations. This
time extension for PMI tax deductibility could allow today’s borrowers to
eliminate their PMI requirement before the deductibility expires. This will
depend, of course, on our appreciation rates during the next several years. In
the meantime, we have no information regarding what happens after the
expiration of the deductible time frame. We can only assume at this point that
the PMI will return to its non-deductible position.
This PMI provision will have no affect for those who avail
themselves of FHA or VA loan options. FHA has its own loan protection coverage
program called MMI and is built into their qualifying provisions and VA has a
Funding Fee which becomes a part of their loan and cannot be expunged without
paying off the loan.
Author's Note: For many this ruling is another
example of government's disjointed attempts to provide assistance to a troubled
housing condition. Accompanying the limitation to this new PMI provision while
trying to increase the qualifying capacity of
borrowers (with increased loan
limits, etc.) there is an impression that no conversation occurred between
legislators making the various rules.