In recent years there has been a misunderstanding of when Private Mortgage Insurance (PMI) cancels on a Mortgage Loan. For several years many, including myself, have understood PMI cancels when The Borrower reaches 80% Loan-To-Value (LTV) through a combination of paying down the principle balance of the mortgage and the value of the property increasing. This understanding is incorrect, and the Consumer Financial Protection Bureau (CFPB) Has Issued Guidelines To Clarify When PMI Cancels.
Unlike FHA Mortgage Insurance Premium (MIP) which is clear and simple to understand:
FHA MIP Cancellation
Private Mortgage Insurance (PMI) is not as clear and simple. There are several ways which PMI can be canceled, make PMI cancellation more difficult to understand.
PMI is required on Fannie Mae, Freddie Mac, and USDA backed mortgages with a Loan-To-Value (LTV) that is greater than 80%. In other words, if the Borrower has less than a 20% down payment, PMI will be required on the mortgage. PMI is regulated by the Homeowner's Protection Act (HPA) of 1998, and also known as the PMI Cancellation Act.
Before I explain what the CFPB has clarified about the Homeowner's Protection Act (HPA) and the cancellation of PMI, we need to first understand 4 key terms:
- Original Value: The lesser of the contract sales price of the property or the appraised value of the property at the time the loan was closed.
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Good Payment History: No payments are 60 or more days past due within two years, and no payments 30 or more days past due within one year of the later of:
- The cancellation date, or
- The date Borrower submit a request for cancellation.
- Cancellation Date: The date the principal balance of the loan is first scheduled to reach 80% of the original value of the property, or the date the principal balance actually reaches 80% of the original value of the property.
- Termination Date: The date which the principal balance of the mortgage is first scheduled to reach 78% of the original value of the property.
Under the Homeowners Protection Act, cancellation of PMI can occur by automatic cancellation or by the Borrower requesting cancellation of the PMI.
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Automatic Termination Of PMI:
- If the Borrower IS current with their payments, the PMI will automatically cancel on the date the principal balance of the loan is first scheduled to reach 78% of the original value of the property.
- If the Borrower is NOT current with their payments, the PMI will immediately automatically cancel on the 1st day of the month following the date the Borrower becomes current after reaching 78% of the original value of the property.
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Borrower Requested Cancellation Of PMI - The Borrower can request the cancellation of the PMI on:
- The date the principal balance of the loan is first scheduled to reach 80% of the original value of the property.
- The date the principal balance actually reaches 80% of the original value of the property.
However, the PMI will only be canceled if all of the following conditions are met:
1) The Borrower submits a written request for cancellation.
2) The Borrower has a good payment history.
3) The Borrower is current on the payments required by the loan.
4) The Lender (servicer of the loan) receives an appraisal requested by the Borrower and paid for by the Borrower, showing the value of the property has NOT DECLINED below the property's original value, and certification the property does not have any subordinate liens against it.
This 4th condition is where the misunderstanding many in the industry, including myself have had about the cancellation of PMI. The appraisal is NOT requested to show an increase in the property value. The appraisal is request to show the property has not decreased in value.
If you look at the 4 key terms I listed above, the 1st term states the "Original Value" is the lesser of the contract sales price of the property or the appraised value of the property at the time the loan was closed. It is the "Original Value" which the PMI cancellation will always work off of. So no matter how much the property later increases in value, it does not matter. The present value only plays a role in the cancellation of the PMI, if the property value declines from the "Original Value", and not if the property increases in value. If the property increases in value it will NOT be a factor in reaching the 78% LTV earlier. However, if the property decreases in value it will have on impact on reaching the 78% LTV, and create a delay in reaching the 78% LTV.
Besides clarifying the role an appraisal plays in the cancellation of the PMI, the CFPB has clarified two other points in the cancellation of PMI.
- While Fannie Mae requires PMI to remain on a mortgage for a minimum of 2 years before a Borrower can request cancellation, HPA does not. CFPB expects Lenders (mortgage servicer) to comply with the HPA requirements. Servicers would be wise to do so, because we all know what happens if the CFPB is disappointed.
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Also the HPA Mortgage Cancellation Guidelines apply only to single family properties which are owner occupied. HPA PMI cancellation does not apply to:
- Second Homes
- 2-4 Family Owner Occupied Properties
- 1-4 Family Investment Properties
Cancellation of PMI on these properties depends on the investor and are up to the servicer as to when to eliminate the PMI.
I hope this clarification which the CFPB has issued, and which I have tried to simplify in this blog, helps eliminate future misunderstandings of when PMI cancels on Fannie Mae, Freddie Mac, and USDA mortgages.
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Info about the author:
George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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