Being able to cancel mortgage insurance is a huge selling point for you as a lender. As you’re talking to borrowers that might be considering MI in order to finance a home, talking about the benefits of MI – especially the fact that it’s cancelable – can help them feel more comfortable about having MI on their loan.
However, there are many LTV points and guidelines that you must understand to be able to explain how and when your borrower can cancel their mortgage insurance.
MI cancellation and termination can be confusing, so let’s break it down to help you master the topic.
What is the HPA
The Homeowners Protection Act of 1999 is also commonly referred to as the PMI Cancellation Act. It was passed to protect consumers from overpaying for private mortgage insurance.
Within the HPA, there are guidelines for determining a few things:
- When borrowers can request to cancel their PMI and stop paying premiums
- When lenders must automatically stop charging borrowers for PMI (automatic termination)
- Disclosures that lenders must provide when a loan requires PMI
- How MI companies must handle unearned premiums that homeowners pay
The guidelines set out by the HPA apply to single-family primary residences that were purchased with a loan requiring borrower-paid mortgage insurance (BPMI).
When can my borrowers request to cancel their MI under the HPA?
There are two key numbers to remember when it comes to cancelling or terminating MI under the HPA: 80% LTV and 78% LTV.
80% LTV: Borrowers can request to cancel their MI when their loan LTV is scheduled to reach or actually reaches 80% LTV of the original value of the property.
78% LTV: Servicers must automatically terminate MI when the loan reaches 78% LTV of the original value of the property
There is one more cancellation point to know about – final termination. When the MI does not get cancelled or terminated due to the previous two provisions, the loan servicer must terminate MI charges after the loan reaches the mid-point of the original amortization schedule.
What’s the difference between original and current value?
You might have noticed that the LTV points we mentioned above were tied to the original value of the property. This is the value of the home at the time of origination. The HPA defines it as the lesser of the sales price of the secured property as reflected in the purchase contract or the appraised value at the time of the loan’s origination.
While the HPA bases the cancellation date LTV calculations on original value, some investor guidelines base the cancellation date LTV calculations on current value. This is the value of the appreciated home based on home improvements or increase in value in the area in which the property is located.
How do my borrowers cancel their MI subject to HPA?
If the borrower is requesting cancellation, they need to contact their servicer in writing around the time the LTV of the loan will reach 80% of the original value to request that the MI be cancelled. Your borrowers can find their servicer on their mortgage statement.
Again, servicers are required to terminate PMI once a current loan, subject to HPA, reaches 78% LTV or the mid-point of the scheduled amortization.
What other requirements must my borrower meet to have their MI cancelled?
There are a few other requirements your borrowers will have to meet to be able to request to cancel their MI:
- Be current on payments
- Have a good payment history – no 30-day lates in last 12 months and no 60-day lates in last 24 months
- Satisfy requirements of loan holder – 1) value of property has not decline below original value and 2) property is not subject to a subordinate lien
While this might not be something you get into with a borrower at the time of origination, it’s possible that your borrowers could come back to you close to the time when they can cancel their MI to ask you what other requirements they must meet.
Are there ways my borrowers can speed up the time to cancel using original or current value?
Here are some helpful tips to help borrowers speed up their time to cancel their MI:
- Pay ahead on their mortgage
- Invest in home improvements to increase the value of their home
- Check their property value to see if it has increased
- Refinance with an LTV under 80%
Is there anything else I might need to know about MI cancellation?
The rest of this information is in-the-weeds and more related to your borrower’s servicer requirements.
- Servicers must complete an escrow audit each year to alert borrowers to their amortization schedule status. They must also alert borrowers if they will be eligible to cancel the coming year based on the loan’s scheduled amortization.
- Loan servicers must alert the borrower when their PMI is canceled as MI companies such as Enact send refunds to the servicer, not the borrower.
- Servicers are required to refund any unearned MI premiums to the borrower within 45 days of the cancellation notice. Enact refunds any unearned premiums to the servicer within 30 days of receipt of the cancellation notice so servicers can meet that obligation.
Hopefully you feel you have a better understanding of the basics (and some of the nuances) of MI cancellation. You can find more cancellation resources on our website, including helpful tables and a training webinar.