Private mortgage insurance (PMI) protects the lender if the borrower stops making payments on a loan. Lenders require consumers to purchase PMI on a Conventional loan if their down payment is less than 20 percent of the sales price or the appraised value of the home. The Homeowners Protection Act of 1998 was passed by Congress to address borrowers’ difficulties in cancelling PMI when they had reached a certain level of equity in the property. Below are the ways in which PMI on a Conventional loan can be terminated:

Borrower-requested termination:

  1. Borrower must initiate request in writing to loan servicer
  2. Borrower must have an LTV ratio of no greater than 80%
  3. Borrower may make principal payments that advance the principal balance to 80% of original value
  4. Borrower must be current on loan and may not have any 30-day late payments in past 12 months or payments that were 60 or more days past due in the 12-month period beginning 24 months before the later of the cancellation date or the date the borrower requests cancellation
  5. Servicer can request evidence that the borrower’s equity is not subject to a subordinate lien
  6. The servicer may require the borrower pay for an appraisal to determine that current value has not declined below original value

Automatic Termination:

  1. PMI must be automatically cancelled on the termination date.  Termination date is defined as the date on which the principal balance is first scheduled to reach a 78% LTV of the original value regardless of outstanding balance for that mortgage on that scheduled date
  2. Borrower may not be delinquent on termination date; if delinquent, PMI must be terminated on the first day of the month beginning after the date that the borrower becomes current
  3. When these conditions are met, PMI must be terminated even if property has declined below original value
  4. Servicers MAY NOT require an appraisal as a condition of automatic termination
  5. Borrower MAY NOT make principal reductions to expedite automatic termination; this approach must be done only on a borrower-requested termination

Final Termination:

  1. When PMI is not terminated under a borrower-requested termination or an automatic termination, the Homeowners’ Protection Act provides that PMI coverage cannot be imposed beyond the first day of the month following the date that is the midpoint of the amortization period of the loan, if the borrower is current on the loan on such date.
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