NEW RULES FOR THE ELIMINATION OF
PMI
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 $417,000) 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 $417,000 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”. With home
values having declined, this latest would seem to nullify the potential for
many PMI cancellations. There has not been the opportunity to
“test” these newest regulations as there has not been a sufficient
time elapsed since their implementation.
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 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.
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. For loans originated after January, 2001,
FHA acquires both an Up-Front Mortgage Insurance premium (UFMIP) and Monthly
Mortgage Insurance Premium (MMI). Any unused portion of the UFMIP of 1.0% 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 any 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 your inquiry regarding the elimination of PMI results in numerous offers to
refinance your loan.