The Homeowners Protection Act or Private Mortgage insurance, what is it? Who qualifies? Can it help you. Find out these and more with AHS.
If you are lucky enough to be sitting on a mattress full of hundred dollar bills, buying a house is easy –– deliver the mattress, pick up the keys. Sure, it might be a little more complicated than that, but it’s still not as involved as obtaining a loan to buy a house. If you’re like most of us, though, that loan is the only way you’ll be able to afford purchasing a home.
When it comes to obtaining a loan, you first have to find someone (aka, a lender) that is willing to hand over the right amount of cash to the seller in exchange for monthly payments from you. This has to be a good deal for the lender, though. If you are not able to make the payments, the lender has to be sure that the house is worth enough to cover the amount of the balance of the loan, as well as the expense of foreclosure of the property and the expense of selling it.
It has long been an estimate that twenty percent of the value of the home at the time of purchase is enough to cover these expenses. That is why it is normal for a lender to ask for a twenty percent down payment from you. With that, the lender is covered in the unlikely event that you are unable to make the payments and the house goes into foreclosure.
What is Private Mortgage Insurance?
Twenty percent of the purchase price of a home can be a lot of money. To encourage home sales, especially to first-time home buyers, lenders began looking for ways to make home ownership more attainable. In order to allow purchasers to put down less than twenty percent of the purchase price, private mortgage insurance (PMI) is usually required. This is insurance that protects the lender but is paid for by the purchaser –– you. You end up paying a little more for your mortgage payment, but it allows you to buy the home. It is also required if you refinance your house and end up with less than twenty percent equity.
Who Qualifies for PMI?
Buyers who cannot afford to pay twenty percent of the purchase price as a down payment and are applying for a conforming loan, sometimes called a conventional loan, are required to purchase private mortgage insurance. Your qualification and the cost of your PMI premium is determined by your credit score, how much money you put down and the number of years (the term) your loan is for.
For buyers that have not-so-good credit scores or little money for a down payment, a loan guaranteed by a federal agency may be the ticket. FHA loans are guaranteed by the Federal Housing Authority, and VA loans are guaranteed by the United States Department of Veterans Affairs. FHA loans have mortgage insurance premiums that are required for the full term of the loan, and VA loans have no mortgage insurance premium requirements.
How is This Related to The Homeowners Protection Act?
The Homeowners Protection Act of 1998, also called the PMI Cancellation Act, was enacted because of difficulties homeowners were having canceling their private mortgage insurance after their equity had increased to above twenty percent of their home’s value. When your equity is above twenty percent, PMI doesn’t benefit anyone except the insurer, yet it continues to cost the borrower money. This act applies to people who have mortgaged the purchase of their single-family principal residence, so it’s for residential mortgages only, the construction of that residence or for refinancing. Mobile homes, condominiums, townhouses and cooperatives are also included. It doesn’t matter if your mortgage has a fixed rate or an adjustable rate. But it does matter if you have borrower-paid private mortgage insurance or lender-paid private mortgage insurance.
What is Lender-Paid Mortgage Insurance?
Lender-paid private mortgage insurance is just what it sounds like. But don’t get excited –– the lender is not really giving you free mortgage insurance. You still pay a fee for the insurance. You either pay it as a lump sum up front or you pay a higher interest rate on your loan for the duration of the loan. That’s right –– it cannot be cancelled.
So Can You Cancel Borrower-Paid Private Mortgage Insurance?
If yours is borrower-paid, knowing how to cancel private mortgage insurance is simply a matter of initiating the cancellation with written notice to the servicer of the mortgage. However, certain conditions have to be met to qualify:
- The mortgage has to have been consummated on or after July 29, 1999.
- The borrower has to have maintained a good payment history.
- If the borrower’s equity in the home has increased as a result of increased property value, the borrower has to satisfy the lender’s requirement for proof, usually through an appraisal.
- The balance of the loan has reached eighty percent based on the original value at the time of the loan and the amortization schedule.
- The balance of the loan has been reduced to eighty percent of the original value based on actual payments made, in the case of paying more than the required monthly payments.
- Conditions have been met to satisfy the lender, usually through an appraisal, that the value of the house has not dropped below the original value.
- There are no liens against the equity in the property.
What is Automatic Termination?
The servicer of the mortgage must terminate the private mortgage insurance as soon as both the balance of the loan drops to seventy-eight percent of the original value based on the amortization schedule and the borrower is current on the payments.
In both cases of borrower-initiated and automatic cancellation of PMI, however, the loans cannot be high-risk mortgages.
That’s a lot to take in, right? Basically, if ever given the choice, avoid the headache and always opt for the “mattress full of money” method.