Is Your Mortgage Insurance Cancellation Overdue?
Mortgage insurance, or PMI (private mortgage insurance), doesn’t last forever. In this article, you can read about:
- Who is eligible to cancel mortgage insurance.
- Different ways to cancel mortgage insurance.
- Mortgage insurance refunds.
- What happens if your lender refuses to cancel mortgage insurance.
Who is Eligible to Cancel Private Mortgage Insurance?
Mortgage insurance cancellation rules apply for all conventional mortgages made after the passage of the Homeowners Protection Act of 1998 (HPA). Borrowers with loans that originated after July 29, 1999 and who meet specified requirements are eligible to cancel their PMI.
For conventional loans, there is often a 24-month minimum PMI payment period. So, even if you meet the requirements below, you may still be required to pay private mortgage insurance for two years.
Canceling Mortgage Insurance
The HPA requires lenders to provide an annual written statement that explains the borrower’s right to mortgage insurance cancellation. The statement must include a way to contact the servicer to determine whether the borrower may cancel PMI. Contact your lender if you do not receive this statement every year.
There are three cancellation situations: automatic, by request, or final termination. In all cases, the property’s “original value” refers to the appraised value of the home, at the time of the current loan origination.
Canceling Mortgage Insurance – Automatic
The “termination date” is the date on which, according to the amortization schedule, the principal balance reaches 78% of original value. The lender must automatically cancel the mortgage insurance on the “termination date.”
In this case, the lender doesn’t determine the actual principal balance based on actual payments. The principal balance comes from the amortization schedule. A borrower cannot advance the “termination date” by making additional payments to lower the principal balance of the mortgage.
It also doesn’t matter if the current value of the property has declined below the original value. Lenders are not allowed to make a borrower to pay for a property valuation, before they cancel mortgage insurance.
The borrower must be current in making payments. If the borrower is not current on the loan on the “termination date,” mortgage insurance still needs to stop on the first day of the first month after the date that the borrower becomes current on the loan.
Canceling Mortgage Insurance – By Request
The “cancellation date” is the date on which the principal balance of the mortgage reaches 80% of original value. The principal balance is based either on the current amortization schedule or the actual payments. A borrower may make extra principal payments that advance the cancellation date.
However, keep in mind that many lenders enforce a two-year minimum for mortgage insurance. You may have to pay for mortgage insurance for the first two years of the loan.
Homeowners can request cancellation of mortgage insurance by submitting a written request.
The requirements for canceling mortgage insurance include:
- The borrower must have a good payment history. The HPA defines “good payment history” generally as either no payments that were 30 days+ past due in the prior 12 months, or payments that were 60 days+ past due in the 12-month period beginning 24 months before the cancellation date.
- The borrower must be current on the loan.
- The borrower may need to certify that any equity in the property is not subject to a subordinate lien.
- A borrower whose property value has declined below the original value may not be eligible for borrower-requested mortgage insurance cancellation. Lenders may require a property appraisal to show that the value of the property has not declined below the original value. They may require the borrower to pay for the appraisal. The “cancellation date” is still calculated based on the original value, and not the new appraisal value.
Canceling Mortgage Insurance – Final Termination
Even if you don’t qualify for requested or automatic termination, there is another condition where mortgage insurance ends. Mortgage insurance cannot be imposed once the midpoint of the amortization period of the loan if, on that date, the borrower is current on the loan.
For a standard 30-year mortgage loan, the midpoint would be the first day of the month following the 180th payment. Since the HPA applies only to residential mortgage loans consummated on or after July 29, 1999, standard 30-year mortgage loans started becoming eligible for final termination on August 2014.
Mortgage Insurance Refunds
Lenders can’t collect mortgage insurance premiums more than 30 days after the termination date.
When a servicer collects unearned mortgage insurance premiums, the HPA requires the servicer to refund the borrower no later than 45 days after the termination of coverage. The refund must go directly to the borrower. Lenders can’t return premiums to the borrower’s escrow account.
What If My Lender Won’t Cancel Mortgage Insurance?
If you think you shouldn’t be paying for mortgage insurance, write to your lender. Under Section 6 of the Real Estate Settlement Procedures Act (RESPA), lenders must acknowledge the complaint within 20 business days. They must resolve the complaint within 60 business days by correcting the account, or by stating the reasons for its position.
FHA and VA Loan Programs Have Different Rules
The Homeowners Protection Act of 1998 applies to conventional home loans. It does not apply to FHA-insured or VA-insured loans.
VA loan programs do not require monthly mortgage insurance. The only insurance due is the VA Funding Fee. This is a one-time fee at the beginning of the loan. The VA Funding Fee is often a part of the mortgage.
FHA loan programs require an Up Front Mortgage Insurance Premium, and a monthly mortgage insurance premium. In most cases, the monthly premium lasts for the life of the loan. If you get an FHA loan, there is no canceling mortgage insurance. The only way to stop paying mortgage insurance is to refinance into a non-FHA program.
Other Ways to Avoid Monthly Mortgage Insurance
Borrow Up to 80% of the Property’s Value
Conventional loan programs usually charge mortgage insurance if you put less than 20% down payment when you buy. If your home’s market value increases, and the new appraised value gives you at least 20% equity, you can refinance to a conventional mortgage that doesn’t include mortgage insurance. For example, if you’re refinancing your home, and the appraiser values it at $500,000, you can borrow up to $400,000 and automatically avoid mortgage insurance. Read about Refinancing Closing Costs.
80/10/10 Refinance
There is a way to avoid mortgage insurance, with an loan-to-value ratio of 90%. An 80/10/10 Refinance requires two loans: a first mortgage for 80%, and a second for 10%. To qualify, you need at least 10% in equity, a FICO score above 730, and a maximum Debt-to-Income Ratio of 38%.
Up-Front Mortgage Insurance
If you have good credit, your lender may allow you to pay a one-time premium. The amount of this mortgage insurance premium depends upon your credit score and Loan-to-Value ratio.
Lender-Paid PMI
Your lender may pay off your mortgage insurance for you, in exchange for a higher interest rate.
The Bottom Line
Keep on top of your mortgage, and make sure you aren’t overpaying PMI. The CFPB has found that lenders aren’t always canceling mortgage insurance on time. This is a violation of the Homeowners Protection Act of 1998. Protect yourself know the rules, and how to demand PMI cancellation.
To report a lender who does not comply with the HPA, notify the appropriate federal regulator. You can report a violation to the CFPB.
Finalally, contact me if you have any questions.
