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NEW RULES FOR THE ELIMINATION OF PMI

Updated:         June 4, 2018

Loan guidelines continue to be revised. With the re-introduction 95% 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 future.

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.

When using the original value as the basis, the following applies:

1.      the loan balance equals or is less than 80% of the original property value.

2.      the property value is confirmed by the servicer, most likely via a new appraisal, conducted by a lender approved appraiser.

3.      the borrower’s payment history must be current and without any past due payments (late payments) within the past 12 months preceding the request for PMI cancellation.

When using the current value as the basis for PMI cancellation, the following applies:

1.      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.

2.      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.

3.      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.

4.      a new appraisal is obtained, conducted by a lender approved appraiser.

5.      the borrower’s 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 $453,100) 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 $453,100 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 borrowers.

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 eventual elimination.

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 "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 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.

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 your inquiry regarding the elimination of PMI results in numerous offers to refinance your loan.

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