PMI is ordinarily applied to home loans with lower than 20% down. Most people who use FHA have little down payment funds and will therefore be required to pay PMI every month. The amount is based on a percentage of the loan principal and may represent a large part of the monthly payment. Borrowers thus benefit from removing PMI from FHA mortgages, but new policies have changed how this works.
In 2013, FHA made significant changes to PMI guidelines. These relate to mortgages with case numbers granted later than June 3, 2013. In the past, all FHA mortgages automatically had PMI terminated when the loan approached a particular level. This is no longer the case. There are now separate rules based on the initial principal and term of the loan. Below is an overview of 2 typical scenarios.
Loans Less Than 90% Loan-to-value
For 30 year FHA mortgages with a down payment of 10% or more, removing PMI is an option based on 2 conditions. First, the mortgage must be at least 11 years old. Furthermore, the amount owed must be 78% or lower than the starting price or current market value.
Mortgages Greater Than 90% LTV
For 30 year FHA mortgages where the down payment is lower than 10% (which is the majority of FHA mortgages), terminating PMI is not permitted. PMI stays in place for the entire length of the mortgage despite how much is paid down. A buyer's only mechanism for removing PMI from FHA mortgages in this category is to refinance it into a completely new home loan.
Removing PMI From FHA Mortgages
Removing PMI from FHA mortgages is not as straight forward as it was previously. Most borrowers choose FHA for the low 3.5% down payment option. It is helpful to understand that PMI will not be automatically eliminated from these mortgages. People with FHA case numbers issued before June 3, 2013 need not be concerned about this change. Also, there are additional exceptions such as streamline refinances of home loans endorsed before May 31, 2009 and Home Equity Conversion Mortgages. Contact your loan officer for additional details.