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Cancelling Mortgage Insurance

September 3, 2015 by

This article applies to Conventional mortgage loans only. As of this writing, FHA mortgage insurance cannot be removed, it is required for the life of the loan.

WHY MORTGAGE INSURANCE?

Mortgage insurance (MI) is required at the time that the mortgage was originated, if there was not sufficient equity in the property. Typically if the LTV (loan-to-value) was greater than 80% or the down payment or equity position was less than 20% – no MI required.

As an example, a 10% down payment would create a 90% LTV, or a 15% down payment would create an 85% LTV – both would normally require mortgage insurance. However if the buyer made a 20% or greater down payment, the LTV would be 80% or lower – and MI would not be required.

The purpose of mortgage insurance is to protect the lender’s interest in the property. The lender agrees to move forward with a loan, if the borrower agrees to pay for insurance that will make them “whole” in the case of default or shortage.

CANCELLATION OF MORTGAGE INSURANCE

However, (conventional) mortgage insurance is not forever, it only lasts until the initial risk to the lender is removed. Mortgage insurance may be removable, when the equity in the property becomes high enough either through

  1. principal pay-down on the loan or …
  2. home value increase (through appreciation or home improvements)

The rules regarding cancellation of mortgage insurance depend on a number of factors.

For conventional loans, mortgage insurance is cancelled passively or actively in one of three (3) ways:

  • Borrower requests cancellation
  • Lender is required to cancel mortgage insurance
  • Cancellation using current appraised value

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Cancellation using original value

The Homeowners Protection Act of 1998 (HPA) covers single-family primary residences whose sales were closed on or after July 29, 1999. HPA provides for borrower-requested cancellation and lender-required cancellation.

Borrower-requested cancellation under HPA (active, borrower must initiate)

The borrowers must provide the lender with a written request for MI cancellation. Upon receiving the request, the lender must cancel the MI policy:

  • on the date the mortgage loan balance is first scheduled to reach 80% of original value, based solely on the initial amortization schedule2, regardless of the outstanding balance of the loan OR
  • on the date the mortgage loan balance actually reaches 80% of the original value.

MI coverage can be cancelled only if:

  • no subordinate liens exist AND
  • the borrowers have a good payment history AND
  • the borrowers satisfy the lender’s requirement that the property value has not declined.
Lender-required cancellation under HPA (passive, no action required)

The lender must automatically cancel the MI policy:

  • on the date the mortgage loan balance is first scheduled to reach 78% of original value, based solely on the initial amortization schedule, regardless of the outstanding balance of the loan AND
  • if the borrowers are current on the payments required by the terms of the mortgage.

Different cancellation requirements apply to loans designated at origination as “high risk.”

Cancellation using CURRENT value

Getting an appraisal to prove sufficient equity in the property. Note that minimum time frames (loan seasoning) apply.

How to Cancel using current APPRAISED value (active, borrower must initiate)

Individual investors establish the criteria for cancelling MI based on a property’s current value. HPA does not address MI cancellation using current value. Fannie Mae and Freddie Mac typically require:

  • that the loan be seasoned at least 2 years AND
  • that the borrowers have an acceptable payment history AND
  • that the LTV based on a current appraisal be 75% or lower if less than 5 years have elapsed since the loan originally closed OR
  • that the LTV based on a current appraisal be 80% or lower if more than 5 years have elapsed since the loan originally closed.

Check other investors’ MI cancellation requirements.

Borrowers must request MI cancellation in writing and provide a current value estimate acceptable to their lender.

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Filed Under: mortgage insurance