What is Private Mortgage Insurance?
If your down payment on your conventional mortgage loan was less than 20% of the total mortgage, then private mortgage insurance or PMI may be part of your mortgage payment. Private mortgage insurance is an insurance policy. The borrower pays PMI when the loan-to-value (LTV) percentage of their property is 80% or higher. This coverage protects the lender or servicer from financial loss in case of default.
What is Loan-to-Value (LTV)? Is it the same as equity?
LTV is a number that describes the ratio of loan amount to the total value of the property. Let’s say your home is worth $200,000 and the mortgage balance is $160,000. Divide $160,000 by $200,000 and you get 0.8, or 80%. When an LTV ratio is higher than 80%, there is an increased risk to lenders or servicers.
Equity is another way to look at calculating LTV ratio. If your LTV is 80%, then your equity is at 20%. When your equity reaches the range of 20-22% of the total mortgage loan, you may be able to request cancellation.
This is how LTV affects private mortgage insurance for conventional mortgages.
Do all mortgage loans with smaller down payments have PMI?
No. Several types of mortgage loans do not require PMI. VA loans (Veteran’s Administration), and some other nonconventional loans do not require PMI. FHA loans (Federal Housing Administration) require a different kind of mortgage insurance. Find out more about FHA loans and Mortgage Insurance Premiums (MIPs).
Why is PMI necessary?
Smaller down payments make it faster and easier for more people buy homes, but they increase the risk to lenders and servicers. If a homeowner stops paying on a mortgage, a larger down payment helps to offset a lender or servicer’s losses. PMI is the cost of making a small down payment and buying a home sooner rather than later.
What does PMI cost?
Your lender or servicer calculates PMI fees based on your loan and your situation. PMI usually costs approximately 0.25% to 2% of your loan balance each year. Your specific PMI charges depend on:
- the size of the mortgage loan
- the down payment paid
- length of the loan term
- your credit score
PMI premiums have been tax-deductible in the past, but this tax-deductible status has changed back and forth more than once. Please check with your tax preparer or financial advisor before claiming your PMI fees as a deduction on your taxes.
How does PMI work?
Your lender is required to provide you with a written PMI payment schedule at closing. This schedule should explain how long it would take you (in months and years) to pay 20% of the principal.
After closing, PMI fees become part of your mortgage payment, usually listed on your statement under Insurance.
Am I eligible to cancel or remove PMI on my account?
You may be eligible to request PMI cancellation. You must have obtained your loan after July 29, 1999 and it must be below 80% loan-to-value. For an investment property, the LTV ratio must be lower to cancel PMI—generally 70%.
Please review this list of requirements and steps for requesting PMI removal or cancellation.
- When requesting cancellation, you must specifically authorize ditech to obtain a current appraisal and assess the cost of the appraisal to your account. Appraisals cost approximately $400. This cost may vary depending on your location or property type.
- According to the new appraisal, the current value of the property must be at least equal to or greater than the original value of the property. The original value equals the lesser of two amounts—the sales price vs. the appraisal (at the time of loan consummation or the day you signed the note).
- You must be current on payments required by your mortgage (including any outstanding late fees).
- You must have a good payment history. This means no payments have been 30 days or more past due within the past 12 months and no payments have been 60 days or more past due within the past 24 months.
- Your property value may not have decreased based on the new appraised value.
- You may be required to certify that there are no other liens against your property.
- Please be aware that some states have additional or different criteria for PMI cancellation.
- Please also be aware that other types of loans and other property use types will have different cancellation criteria. For example, if Freddie Mac owns your loan for a 2- to 4-unit owner-occupied primary residence, then a 65% LTV ratio is required. Find out if Freddie Mac owns your loan.
- Lender-paid mortgage insurance is different from PMI. PMI cancellation requirements do not apply to lender-paid mortgage insurance. You may not cancel lender-paid mortgage insurance.
How do I request PMI cancellation?
Based on your loan-to-value ratio and the list of requirements, are you ready to cancel PMI? Drop us a line!
To request PMI cancellation, please contact us in writing. Mail your written PMI cancellation request with authorization for ditech order an appraisal on your property and assess that cost to your account to:
Ditech Financial LLC
L800 – Escrow Dept.
345 St. Peter St.
St. Paul, MN 55102
Fax: (480) 383-0632
Why did ditech decline my PMI cancellation request?
Legally, lenders and servicers may decline some requests to cancel PMI, even when the loan is at 20% equity. For example, ditech may require a longer PMI coverage period:
- if your home value has dropped
- if you have had multiple late payments
- if you have a 2nd or 3rd mortgage, or
- if you or your loan does not meet other eligibility requirements.
- If your loan has not met the necessary seasoning requirements.
Can ditech automatically cancel my PMI when I have enough equity?
Yes. ditech complies with the federal Homeowners Protection Act. For single family, primary or secondary properties, we automatically cancel PMI when a loan qualifies, even without a request from the borrower. We determine eligibility for cancellation based on the date that your loan schedule shows it will reach 80% LTV. If your loan is current, the loan will be reviewed the date your loan is scheduled to reach 80% LTV, based on original loan terms for eligibility to cancel PMI.
There are some exceptions. Some states provide additional guidelines. Also, certain loan types stipulate an automatic termination date for the first of the month following the midpoint of your loan, or none at all.
I’ve made extra payments to my principal balance. Does that affect my PMI cancellation?
ditech calculates your automatic PMI cancellation date based on amortization or payments. Our calculation does not include additional principal payments. However, if you have made extra payments to your principal balance, you may qualify to request PMI cancellation sooner. Please review your account carefully and follow the instructions for requesting cancellation if you believe you have met all the requirements.
- Lower LTV: For mortgages seasoned between 2-5 years, the required loan-to-value or LTV ratio must reach 80% or less.
- Property Improvements: Substantial improvements to the property have increased the market value.
- Code Compliance: Improvements must conform to local zoning and building codes.
- 30-year FHA mortgages predating June 3, 2013: In general, MIPs will automatically terminate for these loans if they meet two conditions. The loan must have reached 78% LTV and the MIP needs to have been paid for at least 60 months.
- 15-year FHA mortgages that predating June 3, 2013: MIP automatically drops from these loans once they reach 78% LTV. For loans with FHA case numbers assigned on or after June 3, 2013—and with greater than 90% LTV at origination—MIP will remain in effect. For any loans under 90% LTV at origination, MIP is required for 11 years. Also, please note there are additional requirements for jumbo FHA loans.
- Mortgages with an FHA case number assignment date on or after June 3, 2013: FHA insurance can be terminated by the servicer or holder if the mortgage is paid in full before the maturity date.