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Mortgage Insurance Cancellation: Myths and Realities

When it comes to private mortgage insurance (PMI), there are several myths that exist which make buyers reluctant to consider a conventional loan over an FHA insured loan. One of the more common misconceptions is that cancelling PMI is a difficult and time-consuming process. The irony is that the majority of buyers don't harbor those same beliefs or reservations about an FHA insured loan. In reality, FHA coverage may be less easily cancelled or take longer to cancel than private mortgage insurance.

Homeowners Protection Act (HPA) Makes Cancellation Clearer

When the HPA of 1998 went into effect, it required lenders and loan services to provide disclosures regarding mortgage insurance for residential loans obtained on or after July 29,1999. Prior to this, consumers were responsible for requesting mortgage insurance cancellation if they met two factors: one, their loan balance was paid down to 80% of the property's value; and two, they had a good payment history. While many lenders allowed consumers to drop mortgage insurance coverage, consumers had sole responsibility for keeping track of their loan balance.

The HPA established three different times when a lender or servicer must notify consumers of their rights.

1. At closing, lenders must disclose:
• the right to request mortgage insurance cancellation and the date on which the request can be made;
• the requirement that the insurance be automatically terminated and the date on which this will occur;
• any exemptions to the right to cancellation or automatic termination; and
• a written initial amortization schedule for fixed-rate loans only.
2. Each year, loan servicers must send borrowers a written statement that  discloses:
• the right to cancel or terminate mortgage insurance; and
• an address and telephone number to contact the loan servicer for determining when mortgage insurance may be cancelled.
3. When mortgage insurance coverage is cancelled or terminated, lenders must send a notification to borrowers stating:
• mortgage insurance has been terminated and the borrower no longer has coverage; and
• no further premuims are due.

Termination of Coverage

Mortgage lenders and loan servicers must automatically cancel borrower-paid mortgage insurance coverage when the mortgage has amoritized to 78% of the original property value, with all unearned premiums returned to the borrower within 45 days of the cancellation or termination date. This provision also requires that the borrower be current on mortgage payments. If the loan is delinquent on the date of automatic termination, a lender must terminate the coverage as soon as the loan becomes current.

Cancellation of Coverage

With an FHA loan, a borrower can only initiate a mortgage insurance cancellation based on their prepayment of the loan, and even then it can only be requested beginning five years after the loan origination date. On a conventional loan, a borrower can request cancellation in less than five years, based on loan prepayment or an appraisal, as soon as the mortgage balance reaches 80% of the property value.

With either type of loan, all payments must be current. This means a homeowner must not be 30 days late on a mortgage payment within one year of their request or 60 days late within two years.

Why This Matters

By understanding these rules and what they mean for you, you can better evaluate all your home financing options based on facts rather than myths. This is even more important considering FHA's mortgage insurance price increase. Effectively, it increases your monthly mortgage payments and reduces your purchasing power.