Lenders

MI Cancellation Requirements

How does the Homeowners Protection Act of 1998 Affect the Homebuying Process?

On July 29, 1999, the Homeowners Protection Act came into effect. This federal law is designed to protect people who buy homes using private mortgage insurance. It allows the cancellation of private mortgage insurance under certain circumstances and ensures that borrowers are duly notified by their lenders of their right to cancel it when certain requirements have been met. PMI believes it's important that everyone involved in the homebuying process understand the impact of this law and what it means for them.

• Borrowers' right to cancel MI
• Borrowers' right to be informed
• Exceptions to the law

Borrowers' right to cancel MI

• Lenders must cancel a borrower's private mortgage insurance when certain cancellation requirements are met.
• Lenders must automatically cancel a borrower's private mortgage insurance, if paid by them directly, when:

• The borrower's mortgage balance is scheduled to reach 78% of the home's original value (as determined by the loan's initial amortization schedule), and

• The borrower is current on payments.

• Borrowers can also send lenders a written request to cancel their private mortgage insurance when:
  • Their mortgage balance reaches, or is scheduled to reach according to the loan's initial amortization schedule, 80% of the original value of the property;
  • They have a good payment history;
  • They have no other loans taken out on their home; and
  • The property value of their home has not declined.
    
• Borrowers are entitled to a refund of the unearned portion of the premium they paid when their private mortgage insurance is cancelled. Monthly premium plans are funded in whole months. For other payment plans, please refer to the specific product refund schedule. PMI must transfer the unearned premium to the servicing lender within 30 days of its notification. Lenders must transfer the refund to the borrower within 45 days of cancellation.

Borrowers' right to be informed

• The new law requires that on loans with borrower-paid mortgage insurance, lenders must inform borrowers in writing at closing that they have private mortgage insurance and may cancel it at a certain point, and also explain how to do it. For all loans with borrower-paid mortgage insurance, not just those closed on or after July 29, lenders must notify borrowers annually of their rights and provide certain information on the cancellation process.
  
  
• If a borrower's request to cancel mortgage insurance is denied, the lender must provide the reasons for this decision.

Please note the following exceptions to the law ...

• For loans closed before July 29, 1999, borrowers can usually cancel private mortgage insurance once enough equity is built up in their home. Freddie Mac(r) and Fannie Mae(r)* allow automatic cancellation of mortgage insurance once the midpoint of a loan's amortization period is reached.
  
  
• High-risk mortgages are defined and treated separately under the new law. Private mortgage insurance on all high-risk loans must be automatically cancelled at the midpoint of their amortization period as long as the borrower's payments are current. For loans defined by lenders as outside standard guidelines, private mortgage insurance can also be cancelled when the mortgage balance is paid down to 77% of the original value of the home.
  
  
• The law does not cover piggyback, or 80-10-10, loans.
  
  
• The law does not apply to government mortgage insurance (FHA loans). The cancellation provisions of the law also do not apply to lender-paid mortgage insurance.

*Fannie Mae and Freddie Mac are the government-sponsored agenciesthat purchase conventional mortgages from lenders.