If “mortgage” comes up as a topic, eventually the term PMI is mentioned. PMI stands for private mortgage insurance and most want to avoid it at all costs if possible. However, once the benefits of mortgage insurance are explained correctly, the potential borrower warms up to the idea of it allowing low to no down payment. Although at some point, a couple comments come up: “Tell me how to get rid of PMI.” and “When does PMI go away?”
Even though many believe all PMI is the same, it is not. The amounts are different and the ability to cancel vary as well. If a loan with PMI is in place already, this information is worth knowing. If looking to buy a home, this is excellent information to understand up-front. Understanding how each form of PMI works could play an important role in the mortgage decision. So, let’s explain mortgage insurance plus provide details for how to get rid of PMI for each loan type.
What is PMI?
The primary purpose of mortgage insurance is that it protects lenders against foreclosure losses. Mortgage lenders which provide financing over 80% of the purchase price or appraised value are taking more risk. Therefore, if a borrower stops making the house payment and results in a foreclosure, the lender is likely to have severe losses. Mortgage insurance protects lenders against these excessive losses. This sounds very one-sided, but remember that PMI benefits buyers as well. Without PMI, home loans would require 20% down payment.
Up-Front PMI vs Monthly PMI
The two most popular forms of PMI are monthly PMI and up-front PMI. Some loans charge only one of these and others charge both. Government loans like FHA, VA, and USDA have funding/guarantee fees which are a form of up-front, financed mortgage insurance. While conventional, FHA, and USDA loans have monthly PMI included in the mortgage payments. Notice that FHA and USDA have both types of PMI. Conventional loan borrowers traditionally choose monthly PMI, but there are options to do either.
When Does My PMI Go Away?
The up-front PMI is set. Meaning it is either paid at closing as a cost or financed into the mortgage loan. Therefore, there isn’t really a way to get rid of that fee other than paying off the mortgage balance, but it is the monthly PMI payment that causes borrowers to call their lenders asking “When does my PMI go away?” Obviously, borrowers would like any part of the payment to go away if possible. That means if there is a way to cancel the mortgage insurance, the borrower wants to know how and how soon it can happen.
Again, it is important to realize that all loans are not created equally. PMI is treated differently on each loan type. Therefore, let’s explain how to potentially get rid of PMI on each mortgage loan type. Remember, we are only discussing monthly PMI.
How to Get Rid of PMI on FHA Loans
This is where we hear the most erroneous comments. Buyers, Realtors, real estate attorneys, and even some loan officers will state once the balance is under 80%, FHA PMI can drop off. Definitely going by very outdated information. The current rules have been in place for case numbers assigned on or after June 3, 2013.
FHA PMI Cancellation Rules
Loans Greater than 90% LTV – Meaning less than 10% down payment
- FHA PMI must be collected through the end of the loan term, or 30 years, whichever occurs first
Loans Less than or equal to 90% LTV – Meaning 10% down payment or more
- FHA PMI will be collected through the end of the loan term, or 11 years, whichever occurs first
Most buyers using FHA put less than 10% down
Typically, the minimum 3.5% down payment is chosen. Therefore, the FHA PMI will continue for the life of the loan. Although, the PMI does go down each year. The mortgage insurance premium is based on the mortgage balance at each annual anniversary. Since the balance decreases, so does the PMI until the loan is satisfied.
Another question a buyer should ask him/herself if worried about the length of PMI
If comparing with a conventional loan and let’s say the PMI could cancel after 7 – 8 years. Would the buyers really live in the same property and have the same mortgage at that time to realize the PMI canceling? Most of the time the answer is no. Which potentially makes the PMI cancellation factor low on the importance scale.
To answer this question: “How do I get rid of FHA PMI?” a borrower must have one of the following scenarios:
- Put down 10% or more on an FHA purchase – 11-year cancellation
- Borrow 90% or less on an FHA refinance – 11-year cancellation
- Refinance to a conventional loan under 80% – No PMI once closed on a new loan
- Pay off the mortgage in full – stops when paid off
- Other potential options for FHA case files taken out prior to June 3, 2013 – Contact us or your current servicer to check
How to Get Rid of PMI on USDA Loans
USDA loans are an amazing option for buyers looking for a no money down purchase. In addition to that, the monthly PMI is cheaper than FHA. FHA requires 3.5% down payment and USDA requires none. How is USDA PMI cheaper? Good question, but it is!
USDA calls its monthly PMI an annual fee. USDA’s fee is based on a .35 factor compared to FHA’s .85 (based on less than 5% down PMI). Over 40% cheaper than FHA! Just like FHA, USDA PMI (annual fee) continues for the life of the loan. Yet, the amount does decrease each year as the mortgage balance decreases. Eventually going to zero when the mortgage is paid off.
There are no options to remove or avoid the USDA annual fee unless the mortgage is refinanced to another product or the mortgage is paid off. Learn more about USDA household income limits or property eligibility.
How to Get Rid of PMI on Conventional Loans
Long gone are the days of only putting down 20% on a conventional loan. Even though it is still an option, Fannie Mae and Freddie Mac provide great options with as low as 3% down purchase loans. In all of these loans discussed so far, conventional loans are the ones with the best chance for canceling PMI. August 2015, the Consumer Financial Protection Bureau clarified the rules for PMI to stop. There are two main ways to cancel PMI on a conventional loan.
Borrower Requested PMI Cancellation
Once the balance is paid to under 80% of the original price, the borrower may request the cancellation of PMI on the cancellation date. The cancellation date is either the date the principal balance is first scheduled to reach 80% of the original value (lower of the purchase price or appraised value) for the property or date on which the balance reaches 80% of the original value based on actual payments. The borrower may make extra payments to move the cancellation date earlier. There are procedures to follow which are spelled out below.**
Automatic PMI Cancellation
Once balance is paid to under 78% of the original price, the lender must cancel the PMI on the termination date. The termination date is defined as the date which the principal balance is first scheduled to reach 78% of the original value for the property. Although before canceling PMI, the loan must be current.
“Good payment history” means no payments 60 or more days past due within 2 years and no payments 30 or more days past due within 1 year of the later of the cancellation date or the date you submit a request for cancellation.
** PMI could be canceled on a conventional mortgage if the following conditions are satisfied:
- You submit a written request for cancellation
- The borrower must be current on the loan. For the definition of being current, check the CFPB definition here
- You are current on the payments required by your loan (AND)
- If requested and at the borrower’s expense, evidence satisfactory to the note holder that the value of the property has not declined below its original value (value at the time of the mortgage initiation), and that there are no subordinate liens on the property
Keep in mind that each mortgage company has differing procedures so this is not a guarantee but for the most part, these are correct. Also, on second homes or investment properties, the PMI may not automatically cancel like a primary residence.
How to Get Rid of PMI on VA Loans
This is a trick question! Fortunately for Veterans, there is no monthly PMI on a VA loan. Of course, no monthly PMI gives VA loans an advantage over other low to no down payment loans. Although, there is an up-front and financed VA funding fee.
At closing, VA eligible borrowers are charged between 1.25% – 3.3% of the loan amount in the form of the VA funding fee. The fee is financed on top of the base loan amount. Once it is on the loan, it is there for the life of the loan and included in the loan balance.
Although, there is a way to avoid the VA funding fee in the beginning. If the Veterans Administration considers the Veteran 10% or more disabled, the VA funding fee is waived. Thus, the borrower is not charged the fee.
Once a VA loan is obtained, there is really no mortgage insurance to cancel. Be happy that you have a VA loan with no monthly PMI.