PMI is typically required on home loans for greater than 80% LTV. Most homeowners who turn to FHA have little down payment funds and will therefore be required to pay PMI each month. The premium is based on a percentage of the amount borrowed and might account for a large percentage of the monthly payment. Borrowers thus have incentive for eliminating PMI from FHA loans, but updated policies have changed how this works.
PMI Rules
In 2013, FHA changed PMI rules. The changes apply to loans with case numbers generated after June 3, 2013. Previously, all FHA loans automatically had PMI terminated when the loan approached a pre-determined level. This no longer applies. There are now separate rules based on the initial principal and term of the mortgage. Below is an overview of 2 typical loan scenarios.
Mortgages With Greater than 10% Down
For 30 year FHA loans where buyers submit a down payment of 10% or higher, eliminating PMI is an option if 2 conditions are met. First, the loan must be paid for at least 11 years (during which PMI premiums were paid). Additionally, the remaining balance must be 78% or lower than the purchase price or present market value.
Mortgages for More than 90% LTV
For 30 year FHA loans with down payments lower than 10% (such as the 3.5% minimum), removing PMI is not possible. PMI is due for the entire life of the loan regardless of the remaining balance. A buyer’s only method of eliminating PMI from FHA loans of this type is to refinance it into a completely new home loan.
Eliminating PMI From FHA Loans
Eliminating PMI from FHA loans is not as simple as it was in the past. Most people turn to FHA for its low down payment option. It is important to keep in mind that PMI may not be automatically removed from these loans. Customers with FHA case file numbers pulled before June 3, 2013 do not need to be concerned about this change. There are also other exceptions such as streamline refinances of loans endorsed before May 31, 2009 and Home Equity Conversion Mortgages. Speak with loan officer for further information.