Let’s face it, nobody likes mortgage insurance. The good news is that you can (eventually) cancel Private Mortgage Insurance (PMI).
The information below is to serve as a guideline to private mortgage insurance cancellation and is not intended to serve as legal advice. (My compliance department made me say that).
Private Mortgage Insurance (PMI) Cancellation
The content on this webpage is directed towards loans that were originated after July 29th, 1999 AND is only applicable for conventional mortgages. Conversely, government-backed loans (like FHA, USDA, etc.) have their own guidelines for MIP removal.
- Here is Fannie Mae’s “Know Your Options” search to determine if they a mortgage loan.
- Here is Freddie Mac’s “Lookup Tool” to determine if they own a home loan.
First Step: contact the mortgage servicer and request the details for cancelling PMI
The very first step to remove Private Mortgage Insurance is to contact the mortgage servicer and request the details regarding PMI cancellation. They will most likely snail-mail a “PMI Removal Application” and require that the request be submitted in writing.
The private mortgage insurance cancellation guidelines may vary based on the owner of the mortgage. Remember, a mortgage servicer (aka. “the servicer”) is the company that collects the monthly payment from the homeowner, and may not be the owner of the mortgage debt.
For example: Fannie Mae may own the mortgage debt, but Company X is the mortgage servicer that collects the monthly payments. The owner of the mortgage ultimately determines how the PMI can be removed.
Homeowners Protection Act (HPA)
The Homeowners Protection Act (HPA) of 1998, also known as Private Mortgage Insurance Cancellation Act, covers single-family primary residences whose sales were closed on or after July 29, 1999.
The HPA serves as a guideline for Mortgage Insurance cancellation and Fannie Mae and Freddie Mac have updated their own PMI cancellation policies in accordance with the Act.
HPA provides for borrower-requested cancellation and lender-required cancellation. Historically, lenders have viewed an 80% loan-to-value (LTV) ratio as a prudent standard for making consumer real estate loans.
This 80% ratio has served to ensure that the borrower had enough interest in the property to continue to make the payments and, in the event the borrower was unable to make the payments, that the lender had sufficient equity available to cover foreclosure costs.
Borrower-requested PMI cancellation under HPA
The borrowers must provide a written request for PMI cancellation to the lender who cancels the PMI policy:
- On the date the mortgage loan balance is first scheduled to reach 80% of original value, based solely on the initial amortization schedule, regardless of the outstanding balance of the loan, or
- On the date the mortgage loan balance actually reaches 80% of the original value
As an FYI, the aforementioned points may sounds a bit odd and may appear to be suggesting the same thing; however, the distinction between “scheduled” and “actually” reaching 80% is the key. If someone pays down their mortgage aggressively then the “actually reaches 80%” become applicable.
Eligibility conditions for PMI removal
The borrower must satisfy any lender’s requirements that the property value has not declined and that no subordinate liens exist. Borrowers may be charged for an appraisal, broker’s price opinion (BPO), or a certificate of value to determine the property’s current value.
Do NOT order your own appraisal. The mortgage servicers are required to order the appraisal.
The borrower must also have a good payment history which means:
- the borrower must be current at the time cancellation is requested and any outstanding late charges must have been paid,
- no 30-day late payments in the last 12 months, and
- no 60-day late payments in the last 24 months
As an FYI, Fannie Mae doesn’t have any seasoning requirements for the aforementioned guidelines.
Mortgage services that may try to adhere to the “letter of the law” and require PMI exist for 24 months in order to comply with the zero 60-day late payments in the last 24 months.
Our suggestion would be to challenge the servicer and site the HPA to get the PMI removed if you have paid down the balance to that 80% LTV.
Conventional mortgages are subject to the automatic termination of mortgage insurance when certain conditions are met.
The borrower does not have to take any action to initiate an automatic termination of the mortgage insurance, nor may be charged for processing an automatic termination. However, borrowers should be pro-active as it’s probable that the PMI can be removed long before the automatic termination period.
For single-family principal residence and second home loans closed on or after 07/29/99 (and using the occupancy status from closing), the mortgage insurance is automatically cancelled when:
- The date that the loan is first scheduled to reach 78% of the original property value based on the initial amortization schedule, or
- The first day of the month after the midpoint of the loan’s amortization period.
Borrower’s payments must be current on the scheduled termination date. If the loan is not current on the scheduled termination date (at the midpoint or when the trigger LTV is scheduled to be reached), then the servicer must terminate the PMI on the first day of the month after the loan becomes current (including late charges).
What determines the property valuation for PMI removal?
The table below provides an outline for the various valuation methods used for private mortgage insurance removal. These are the guidelines for mortgages that are owned by Fannie Mae and Freddie Mac.
The mortgage servicer will determine the home’s value. Any costs associated with the valuation will be the responsibility of the homeowner.
Do NOT order an appraisal of your own. The Mortgage Servicer is required to validate the property’s value via their third-party sources. Any outside valuations will not be considered.
WARNING: all costs incurred will be the responsibility of the homeowner, regardless of the outcome.
80% LTV for PMI removal using the home’s original value
This is a fairly straight-forward guideline. The PMI can be removed when the loan-to-value (LTV) reaches 80% of the homes “original value”.
The “original value” depends on whether the existing mortgage was a purchase loan or a refinanced loan.
- The original value for purchase loans is defined as the lesser of the sales price or the appraised value at the time of loan consummation.
- The original value for loans that were refinanced will be the appraised value during the refinance.
When trying to use the property’s original value, the servicer must validate that the value has not declined.
The servicer will attempt to validate the value via an Automated Valuation Model (AVM) at no cost to the homeowner. If this is not available, they will order a Broker’s Price Opinion (BPO). The cost for a BPO is about $150 to $200.
The lender has the right to confirm that there are no subordinate liens (i.e. second loans, piggy back loans, etc.) before cancelling the PMI.
Using the home’s current market value for PMI cancellation
A borrower may request that the mortgage servicer remove PMI based on the home’s current market value.
The mortgage servicer will order an appraisal when the homeowner wants to use the home’s current market value. The cost of appraisals typically run between $550 and $750.
PMI is mandatory for 2-years unless substantial improvements have been made
For loans that are less than two years old, there must be substantial improvements made to the home that increased the value in order to use the current market value.
“Substantial improvements” are renovations that substantially improved the property value or substantially extended the useful life of the home.
Example of substantial improvements are: replacement of major components, relocation of plumbing, gas fixtures, application, or significant structural additions.
Substantial improvements are not repairs to keep the home maintained, functional, or cosmetic.
NOTE: the mortgage servicer may request a list of the type of improvements, the total cost spent, and the dates that the improvements were completed. They may even require invoices and receipts.
75% LTV for PMI removal when the loan is 2 to 5 years old
For loans that are between two and five years old, the PMI can be removed using the home’s current market value when the loan-to-value (LTV) is 75% or less.
Admission of ignorance: we’ll admit that we don’t know what LTV is required if substantial improvements have been made and the loan is 2 to 5 years old. Logic would suggest that the LTV can be 80%; however, the mortgage world and logic don’t often overlap. We’d love to know the answer if anyone has personal experience with this.
80% LTV for PMI removal for loans older than 5 years and using the home’s current market value
The borrower can cancel PMI using home’s current market value after the loan is older than five years. Substantial improvements are not required for the removal of PMI.
Other random PMI cancellation notes
The following items are being included to make this page comprehensive; however, these topic may not be applicable to the vast majority of loans.
2 to 4-unit primary residents and investment properties
What’s interesting is that Fannie Mae and Freddie Mac have different requirements for PMI cancellation on multi-unit homes. See the table at the beginning of this blog post for more details.
PMI cancellation for loan modifications
For all loan modifications, mortgage insurance cancellation and termination eligibility criteria must be based on the terms and conditions of the modified loan.
To determine the value of the property at modification, you may order a new appraisal or use an automated valuation model (AVM). If the AVM does not provide a reliable confidence score, a Broker Price Opinion may be used.
The only applicable section in the aforementioned guidelines that are applicable to High-Risk Loans is the HPA’s automatic termination guidelines; the rest of the sections do not apply.
As an FYI, most borrowers do not have a high-risk loan (and in the event you do, it will be made obvious that you do with the loan disclosures).