Basics of PMI and Housing & Urban Development Rules
Many people think a Private Mortgage Insurance (PMI) is a life insurance policy for mortgages in that
the mortgage would be paid in the event of the policy holder's death. This is surely untrue!
Private Mortgage Insurance is an insurance whereby a lender may approve a mortgage accouting for greater than 80% of the appraised value of the home. This insurance is used in the event the borrower defaults
on the mortgage. In other words, if you have less than 20% down payment on a home then you will need a Private Mortgage
Insurance. It is statistically accurate to state that people who borrow more than 80% of the home's value will have a significantly
greater chance on loan defaults.
Other mortgage insurance loans such as the HUD's (Housing and Urban Development) FHA loans are insured by the Federal Government.
You can find more information on HUD's FHA insurance loans and other pertinent, related information at "Let HUD's FHA Help You Buy a Home".
In general, these loans are designated for single family homes and for 2-unit, 3-unit, and 4-unit properties.
The cost of PMI can vary depending on several factors including who is the insurance carrier, the amount of the loan and credit rating of borrower.
The average cost is approximately $25 to $100 per month for an average priced home.
The PMI's main advantage for the borrower is the lower down payments some as low as 5% or 10%. This is critical for many first-time purchasers as cash flow is
often a major concern after all the closing costs such as agent fees, property taxes and appraisal, home inspection and transfer fees. Moreover, the PMI is cancellable once certain conditions are met.
This is in contrast to FHA mortgage insurance which is active throughout the loan's full term. In 1998, the Homeowners
Protection Act was passed which enabled a much easier cancellation methodology.
All qualified loans initialized after 29 July 1999 will enable home buyers to request
cancellation of their insurance when their mortgage decreases below 80% of the purchase price or the appraised value of the home at the time of purchase whichever is less.
However, there are stipulations associated with the cancellation of PMI:
1) No delinquiencies in the the previous one or two years. Meaning no late payments greater than 30 days in the last yeart of mortgage payments or 60 days later within the last two years.
2) The property's value has not declined below the original value.
3) The property does not have a second mortgage, commonly known as a home equity loan.
4) The loan is not VA or FHA government-guaranteed loans.
5) The loan is not considered high-risk which is outlined and described by your lender. For example, the lender may designate
mortgage loans which exceed $252,709 as non-corforming mortgages; in other words, high-risk loans. HPA does not define high-risk loan classifications.
This definition is determined by your lender.
6) Mortgage loans acquired previous to 29 July 1999 have different provisions outlined by HPA.
7) The loan was carried forth under a residential mortgage transaction. There are four requirements to meet
the definition of a residential mortgage transaction:
i) a mortgage or deed of trust must be created or retained
ii) the property securing the loan must be a single-family dwelling
iii) the primary residence of the borrower must be the single-family dwelling in question
iv) the reason for transaction must be one of finance to acquire property, initialize construction of said property, or
refinance the property.
Automatic termination of PMI may be enacted under HPA regulations which places the onus on the mortgage lenders to automatically
cancel PMI coverage once your mortgage reaches 78 percent of the value and you are current with your loan. If on the date of automatic
termination the loan is delinquent then the lender must terminate as soon as the loan becomes current. The lender must terminate the PMI
premiums within 30 days of cancellation or automatic termination date set forth in the initial agreement. All unearned premiums must be
returned to you from the lender within 45 days of cancellation or date of termination.
In the case of high-risk loans, lenders must cancel PMI premiums when the mortgage reaches 77 percent of the original value of property with
the provision the loan is current.
The HPA states that if PMI is not canceled or terminated, coverage must be removed once the midpoint of the amortization period is reached.
For instance, on a 30-year loan with 360 equal monthly payments, the midpoint's time-frame is 180 payments. Again, the provision being the loan must
be current. Final termination is required 30 days within this date.
Disclosure requirements set by the HPA are established at three times throughout the loan period whereby the lender must notify and inform
the borrower of their rights:
1) at loan closing
2) annually
3) upon cancellation or termination of PMI
Keep in mind the disclosure's content will vary and is dependent on the following factors:
1) Is the PMI paid by the borrower or lender?
2) Is the loan a fixed-rate mortgage or an adjustable-rate mortgage?
3) Is the loan considered high-risk or not?
At the closing of the loan, the lender must disclose the following to borrowers:
1) Cancellation request rights of PMI and the date upon which the request of cancellation can be issued by borrower.
2) Date at which PMI must be automatically terminated.
3) Exemptions to right to cancel or automatic termination.
4) If a fixed-rate mortgage, an explicit initial amortization schedule.
Annual disclosure from your mortgage lender via letter includes:
1) Right of cancellation or termianation of PMI.
2) Contact of lender for information on date of PMI's cancellation including address and telephone number.
Upon termination or cancellation of PMI, lender must provide via letter form:
1) PMI has been terminated or cancelled and the borrower is no longer PMI covered.
2) No PMI payments need to be made.
For loans acquired previous to 19 July 1999, annual statements must be sent to the borrowers. It must
state that with specific conditions met PMI may be cancelled. Moreover, contact telephone number and address
to lender for any questions regarding PMI cancellation must be provided in the letter. However, HPA's
regulations of cancellation and automatic termination do not apply to loans acquired before 19 July 1999. Many lenders
state they plan to implement HPA's rules with new and existing loans. For further information please contact your
mortgage loan provider.
In the event your home's value increases due to home improvements or market conditions you may reach the 80 percent stage much
quicker. Keep in mind that it may take between 10 to 15 years before you do reach the 80 percent of loan value as most payment in
the initial years are accounting for interest charges. If you feel it has reached the 80 percent mark before it's planned time you
may be able to cancel the PMI premiums. Although HPA's law does not require your mortgage lender to do so you should contact them
to find out.
A History of HPA's New Rules
Historically, lenders honored consumers who requested cancellation of PMI coverage once their loan balance reached 80 percent
of the property's value or lower than 80 percent and the loan was currently in good standing. However, most consumers were unaware of this possibility.
Instead the onus was placed upon the borrower to keep track of their equity and how to send in the requisition of PMI cancellation. Most people
continued to pay the PMI premiums even when they reached this stage and paid between $250 and $1200 annually for several years before they cancelled.
This fact initiated HPA's new regulations which bestowed and outlined the responsibilities upon borrower and lender for PMI coverage and premiums.
For more information on Private Mortgage Insurance and when PMI may be cancelled or terminated visit:
Mortgage Insurance Companies of America
727 15th St, NW, FL 12
Washington, DC 20005-2168
www.privatemi.com
202-393-5566
As well, visit the U.S. Department of Housing and Urban Develpment Customer Service Department regarding PMI:
U.S. Dept. of Housing & Urban Development
Attn: Customer Service
451 7th Street, SW
Washington, DC 20410
www.hud.org
800-767-7468
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