Some borrowers need a lower down payment and some borrowers choose not to put a significant down payment. Private Mortgage Insurance (PMI) is a powerful tool used to help borrowers buy a home with a down payment less than 20%. Not only does PMI allow one to buy a home with a lower down payment, first-time and repeat homebuyers do not need to have PMI forever — it can either be automatically terminated or a borrower can request cancellation without the need to refinance.
Homeowners Protection Act (HPA)
As a primer, lenders view an 80% loan-to-value (which is a 20% down payment) as a standard for making a mortgage for a borrower. This 20% equity position was established to ensure the borrower has sufficient interest in the property to make timely payments and in the event the borrower was not able to make payments, there would be sufficient equity to cover the foreclosure costs.
PMI was created to mitigate this risk for a lender when a borrower needed or wanted to put less than 20% down at time of mortgage origination. Over time, equity is accumulated through amortization and home appreciation and an 80% loan-to-value is established. When this 80% loan-to-value is secured, PMI is truly no longer needed since it does not provide any material protection to the lender and does not benefit the borrower.
Prior to July 1999, it was close to impossible to cancel or terminate PMI. Courtesy of the Home Protection Act (a.k.a. HPA or PMI Cancellation Act) the framework was established on when and how PMI could be canceled or terminated.
PMI Cancellation for Conforming Loans
Conforming Loans (a.k.a. Agency Loans or Conventional Loans) meet the Fannie Mae or Freddie Mac guidelines to include loan limits. Conforming loans are covered under the HPA and one can petition to request to cancel PMI when you have reached and 80% loan-to-value based the original value (i.e. the price paid for the home or the appraised value, whichever is less).
Per the HPA, all cancelation requests must be submitted in writing to the loan servicer. The loan servicer must take action to cancel if: the principal balance is scheduled to reach 80% of the original value based on initial amortization schedule or actual payments; the borrower has a good payment history (i.e. no 60-day lates or more in the first 12-months of the last 24-months prior to cancellation petition date and has not made a payment that was 30-days or more past due within 12-months of cancelation petition date); evidence the value of the collateral has not declined, at the borrowers expense; and evidence the current collateral is not subject to subordinate liens.
If the value of a home has increased since closing, you may be able to cancel your PMI early based on the current value and current balance. Your loan servicer will likely require evidence of the value increase, at the borrowers expense. The method of validating the collateral will be determined by the the loan servicer and may be in the form of Broker Price Opinion (BPO) or full appraisal.
IMPORTANT: in addition to HPA, the loan investor may also have seasoning requirements and/or cancellation requirements. Consult you PMI Disclosure provided at closing or contact your loan servicer for a copy.
PMI Termination for Conforming Loans
Your PMI will automatically be removed at a certain point. That point is once the borrowers loan balance is at 78% or the original amount borrowed.
Refinance to remove PMI
For some not all, a refinancing strategy is the best way to remove PMI. Consult with a Mortgage Strategist with the Martini Mortgage Group to discuss this advanced strategy
Certified Mortgage Advisor and Raleigh Mortgage Broker Kevin Martini Summary
•Private Mortgage Insurance (PMI) is a powerful tool used to help borrowers buy a home with less than 20% down payment.
• The Home Protection Act (HPA) established the framework when and how PMI can be cancelled or terminated.
• Conforming Loans are covered under the HPA and one can petition to request cancellation of PMI when they have reached an 80% loan-to-value based on original value.
• If the value of a home has increased since closing, it may be possible for early termination of PMI subject to lender requirements.
• Automatic removal occurs once loan balance reaches 78%.
• Refinancing may also be an option for some in order to remove Private Mortgage Insurance (PMI).
