UNDERSTANDING MORTGAGE INSURANCE
Here is a great recap that will help Buyer Agents explain PMI when working with Buyer clients who have less than 20% down. It makes it clear how long a buyer must carry PMI and what must be done to cancel it ! Thanks to our author !
Insuring Your Home Loan
I was reading an article in RISMedia, and thought it would be a good idea to “pass this on” for better understanding.
RISMedia, June 3, 2011—When it comes to private mortgage insurance (MI), there are several myths that exist that make buyers reluctant to consider a conventional loan with MI as an option when purchasing a home. One of the more common misconceptions is that cancelling MI is a difficult—not to mention time-consuming—process.
The irony is that the majority of buyers don’t harbor those same beliefs or reservations about an FHA insured loan when, in reality, FHA coverage may be less easily cancelled, or take longer to cancel, than MI.
HPA Makes Cancellation Clearer
When it went into effect as a new federal law, the Homeowners Protection Act (HPA) of 1998—which applies to both FHA and MI insured loans—required lenders and servicers to provide disclosures regarding MI for residential loans obtained on or after July 29, 1999. Prior to this, consumers were responsible for requesting MI cancellation if they met two factors: one, their loan balance was paid down to 80 percent of the property; and two, they had a good payment history.
While many lenders obliged consumer requests to drop MI coverage, consumers had sole responsibility for keeping track of their loan balance (most never did, so they continued to pay these additional costs).
The HPA established three different times when a lender or servicer must notify consumers of their rights.
At loan closing, lenders must disclose:
• The right to request MI cancellation and the date on which the request can be made
• The requirement that MI be automatically terminated and the date on which this will occur
• Any exemptions to the right to cancellation or automatic termination
• A written initial amortization schedule for fixed-rate loans only
Each year, loan servicers must send borrowers a written statement that discloses:
• The right to cancel or terminate MI
• An address and telephone number to contact the loan servicer for determining when MI may be cancelled
When MI coverage is cancelled or terminated, lenders must send a notification to borrowers stating:
• MI has been terminated, and the borrower no longer has MI coverage
• No further MI premiums are due
Termination of Coverage
Under the terms of the HPA, mortgage lenders or servicers must automatically cancel borrower-paid MI coverage when the mortgage has amortized to 78 percent of the original property value, with all unearned premiums returned to the borrower within 45 days of the cancellation or termination date. This provision also requires that the borrower be current on mortgage payments required by the terms of the loan, and if the loan is delinquent on the date of automatic termination, a lender must terminate the coverage as soon as the loan becomes current.
Cancellation of Coverage
Also under the HPA, a homeowner has the right to request MI cancellation when the mortgage balance reaches 80 percent of the original property value. All payments must be current, meaning a homeowner must not be 30 days late on a mortgage payment within one year of their request, or 60 days late within two years.
However, a borrower can only initiate a cancellation request for FHA based on their prepayment of the loan, and even then, it can only be requested beginning five years after the loan origination date.
With MI, homeowners can request cancellation based on prepayment of the loan, as well as an appraisal. Despite falling property values, it’s possible for homeowners to gain enough equity in their home to request cancellation in less than five years based on a home appraisal.
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I hope this article was helpful in better understanding Mortgage Insurance.
Which Home Loan is right for you?
IMPORTANT: If you or someone you know is interested in buying or selling a home in the Palm Desert Area, try searching properties on the same Desert Area MLS Realtor’s use, or give me a call….or visit my website at Palm Springs Homes and Estates. I will be happy to give you or your referral my “red carpet service.” After the sale, I will send you a $50 Gift Certificate towards dinner in a fabulous Palm Springs Area Restaurant so you can celebrate!
Brought to You By Your Favorite Realtor,
Nancy Hankin
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