Can I Remove PMI From an FHA Loan?

FHA loans offer an accessible pathway to homeownership, particularly for individuals who might not qualify for conventional mortgages due to lower credit scores or smaller down payments. These loans are insured by the Federal Housing Administration (FHA), providing a level of security for lenders. A mandatory component of nearly all FHA loans is mortgage insurance, which safeguards the lender against potential losses if a borrower defaults. Understanding the nuances of this insurance is important for FHA borrowers, especially those seeking to manage their housing costs over time.

FHA Mortgage Insurance Basics

FHA mortgage insurance involves two distinct components: the Upfront Mortgage Insurance Premium (UFMIP) and the Annual Mortgage Insurance Premium (Annual MIP). The UFMIP is a one-time fee, typically 1.75% of the loan amount, which borrowers usually pay at closing. This premium can also be financed into the loan, increasing the overall loan balance and accruing interest over the loan term.

The Annual MIP is an ongoing cost, calculated as a percentage of the outstanding loan balance each year, and divided into 12 monthly payments. This annual premium typically ranges from 0.15% to 0.75% of the loan amount, with the exact rate depending on the loan term, the original loan amount, and the loan-to-value (LTV) ratio at origination. Both UFMIP and Annual MIP protect lenders by funding the Mutual Mortgage Insurance Fund (MMIF), which allows FHA loans for a broader range of borrowers, including those with lower credit scores or smaller down payments.

Automatic Termination Rules

The automatic termination of FHA Annual MIP depends on when the loan was originated and initial loan-to-value (LTV) ratio. For FHA loans originated before June 3, 2013, the Annual MIP could terminate. If the original LTV was 90% or less, the MIP would cease after 11 years. For loans with an original LTV greater than 90%, the MIP was required for the entire loan term.

For FHA loans originated on or after June 3, 2013, the Annual MIP is typically required for the entire loan term, regardless of initial LTV or equity accumulation. The only exception is for loans with an original LTV of 90% or less, where MIP may still terminate after 11 years. Most FHA borrowers who made the minimum 3.5% down payment will have Annual MIP for the life of the loan, meaning it will not be automatically removed as equity grows.

Borrower-Initiated Removal Criteria

For FHA loans originated before June 3, 2013, borrowers may request removal of their Annual MIP. To qualify, the loan-to-value (LTV) ratio must reach 78% of the original home value. This means the loan balance must be 78% or less of the home’s value at the time the loan was originated. Some lenders may require an 80% LTV for removal.

Additionally, borrowers need a consistent history of on-time payments, usually for a minimum of five years. The ability to initiate MIP removal is largely limited to these older FHA loans. For most FHA loans originated after June 3, 2013, Annual MIP generally remains for the entire loan term, unless the initial LTV was 90% or less, in which case it terminates automatically after 11 years.

Process for Requesting Removal

If a borrower’s FHA loan meets eligibility for removal, they should contact their loan servicer. The servicer can confirm eligibility based on the loan’s origination date, original loan-to-value ratio, and payment history.

The servicer typically requires a new appraisal to establish the home’s current market value, used to calculate the current loan-to-value (LTV) ratio. This appraisal verifies the borrower has achieved the necessary equity threshold, such as 78% LTV. Borrowers should expect to pay for this appraisal, with costs typically ranging from $400 to $600. Once the appraisal is complete and the LTV requirement is met, along with a satisfactory payment history, the servicer can process the request to remove the Annual MIP.

Refinancing Considerations

For many FHA borrowers, particularly those with loans originated after June 3, 2013, refinancing offers the most viable path to eliminate mortgage insurance. This strategy involves converting an FHA loan into a conventional loan. To avoid private mortgage insurance (PMI) on a conventional loan, borrowers typically need at least 20% equity in their home, meaning an LTV of 80% or less.

Refinancing entails new closing costs, which can range from 2% to 5% of the loan amount, covering fees such as appraisal, title insurance, and origination charges. Borrowers should evaluate the new interest rate offered on the conventional loan, as a lower rate could offset the closing costs over time. This option allows borrowers to shed the ongoing FHA Annual MIP, potentially leading to lower monthly housing expenses, provided the new loan terms are favorable.