What is PMI?
PMI is a type of mortgage insurance policy that provides compensation by the insurance company to the Lender in the event a borrower defaults on the mortgage. PMI does not protect the borrower from having to pay the mortgage if they are unable to do so. It is an insurance policy only for the Lender and has no benefit to the borrower other than to allow a borrower who would not normally qualify for a mortgage to be approved for a mortgage. Typically, PMI is a monthly amount paid by the borrower with the mortgage payment or a one-time payment made by the borrower at closing. Sometimes, the bank will pay for the one-time payment option, but this is not common.
When does a bank require PMI?
On Conventional loans and SONYMA loans a lender will generally require PMI when the requested Loan amount is greater than 80% of the value of the property a borrower is looking to mortgage (Loan-to-Value). On an FHA mortgage, there is always mortgage insurance (called MIP or Mortgage Insurance Premium), regardless of the Loan-to-Value. VA loans have a one-time VA Funding Fee, which is similar to PMI because is a payment required before the bank approves a loan. There are instances where a veteran may be exempt from the VA Funding Fee (typically due to a service-related disability).
When do the PMI/MIP payments end?
On Conventional Loans, a borrower may request the PMI payments to cease once the Loan-to-Value is 80% and PMI may automatically terminate once the Loan-to-Value hits 78%. For FHA loans, if the initial Loan-to-Value was over 90%, the MIP continues for the life of the loan. FHA loans where the original Loan-to-Value was 90% or less, payments will automatically cease after 11 years. Cessation of PMI is dependent on other factors such as a good payment history. If at the time the borrower is allowed to ask for the PMI to end, the borrower fails to do so, payments may be required to continue for up to a year past the date that they could have ended. For this reason it is important that borrowers understand their rights with regard to what date they may ask for the PMI to terminate and to calendar that very important date.
Laura M. Endres, Esq.
