MORTGAGE INSURANCE

Conventional Mortgages

Mortgage insurance on conventional loans comes in three forms. Sometimes it is possible to use more than one of these options on the same loan. That is known as split MI.  


Upfront MI - A one-time fee is charged in the form of a percentage of the loan (much like FHA). This type of MI can never be removed. Upon closing the funds are permanently dispersed.  

Lender Paid MI - The lender buys the MI for you by raising your interest rate and using the extra money paid at the higher rate. Since the rate is determined permanently upon closing this type of MI can never be removed.

Borrower Paid MI - An additional payment is made monthly for the MI with your regular mortgage payment. This is the most common type of conventional MI and the only kind that can later be removed if enough equity exists.

When can it be canceled?

FHA loans require that you have the MI for at least 5 years before it can be removed regardless of the amount of equity gained within that period of time.

If your loan is following the normal amortization schedule, or in other words, you are making the required payments and no overpayment each month, your MI will, in most cases, fall off once you have met the following two requirements: Pay MI for 5 full years and have a 78% loan-to-value ratio based upon the original sales price.  

If you have accelerated your mortgage payments to pay off your mortgage more quickly, you will need to request that the MI be removed. Note that you cannot have been more than 30 days late on a mortgage payment in the past 12 months when doing so.

For loans with FHA case numbers assigned on or after June 3, 2013, FHA will charge the monthly MI as follows:
 
·  Mortgages with a down payment of 10% or more – monthly MI will continue for 11 years or the end of the mortgage term, whichever occurs first.

·  Mortgages with a down payment of less than 10% - monthly MI will continue for the entire term of the mortgage.

Methods for canceling

If you meet these qualifications, submit a request in writing to your mortgage company. Indicate that you believe you have met the FHA requirements for removing MI and that you would like it removed. Request that the mortgage company follow up with you in writing regarding your request. It is advisable to send your letter with some kind of "proof of delivery." When the mortgage company receives your letter they will review your loan and payment history and determine whether or not you qualify for MI removal. If they determine you qualify for the MI removal, they will send your request to FHA, which will process the approval to have the MI removed. Be patient - this process takes time, often many months.
Mortgage Insurance carries a very important role in the mortgage market, but the sooner you can be free of it, the better!
In years past, buyers had the option to avoid mortgage insurance (MI) by taking out a first mortgage of 80% of the home’s value and then following that with a second mortgage for the remainder needed. The interest rate on the second was higher to offset the added risk of not being first lien holder or first in-line to get paid if there is a default. However, as foreclosures spiked and real estate values began to plummet, the risk of being in second lien position with less than 20% down could no longer be justified by any lender. For this reason, many homeowners buying a home in the past few years have had to take out MI.

There are two basic types of loans that require MI:

FHA Loans are insured by the FHA (Federal Housing Administration) or federal government.

Conventional Mortgages, or loans underwritten so they can be sold to Fannie Mae or Freddie Mac, are insured by private companies.

The rules regarding MI and when and how it can be removed on FHA loans are very specific and the same regardless of the actual lender. However, the MI associated with conventional loans can vary from lender to lender, though they do share many close similarities as a result of a law passed in 1998.   


FHA Loans

Every FHA loan requires two types of MI:

Upfront MI - A one time fee that is 1.75% of the loan amount. This amount is automatically added to your loan and can never be recouped.  However, if you refinance within the first 36 months a portion of it can be credited toward your next upfront MI payment.

MI Paid Monthly - The monthly premium that is paid as part of your mortgage payment. If your FHA loan closed after January 1, 2001 this can be removed when certain conditions have been met.
When can it be canceled? 

Lenders typically require that the MI is in place for a minimum of 3 years regardless of the level of equity reached during that period. Unlike FHA loans where the MI can only be removed once the loan is paid down to 78% of the original sales price, conventional MI can be removed as a result of appreciation realized.


The Homeowner's Protection Act of 1998 allows borrowers whose loan was originated after July 29, 1999, to request cancellation of MI at 80% loan to value (LTV).  Multiply your current loan balance by 1.25. Your home has to be worth at least this much to get rid of your MI. Lenders are required to automatically terminate borrower paid MI at 78% LTV based on the amortization schedule if the loan is current.

Methods for canceling

To qualify for the cancellation, you'll have to demonstrate to the lender that the property is as valuable as you think it is. Don't pay for a full appraisal before contacting the lender that services your loan. Under Fannie Mae and Freddie Mac rules, it is the lender-servicer, not the homeowner, who chooses the appraiser.  Request in writing to your current lender-servicer that the MI be cancelled, and ask them to order an appraisal to verify the equity if you are depending on appreciation or home improvement to earn the equity.  If you have paid on the mortgage to such a point that you have 20% in equity based upon the original sales price, they can cancel without an appraisal in most cases.



 

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