Can You Get Rid of PMI on an FHA Loan?

Mortgage insurance is a common part of homeownership, and many homeowners want to eliminate this recurring cost from their monthly payments. This article explores the details of mortgage insurance associated with FHA loans and the pathways available for its removal.

Understanding FHA Mortgage Insurance Premiums

FHA loans, backed by the Federal Housing Administration, offer accessible financing options for many homebuyers, often with lower down payment and credit score requirements. To offset the increased risk, FHA loans mandate Mortgage Insurance Premiums (MIP). Unlike Private Mortgage Insurance (PMI) on conventional loans, FHA MIP is required regardless of the down payment amount.

MIP comprises two components: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (Annual MIP). UFMIP is a one-time charge, typically 1.75% of the loan amount, which can be paid at closing or financed into the loan balance. Annual MIP is an ongoing fee, paid monthly, with rates generally ranging from 0.15% to 0.75% of the loan amount, depending on factors like loan term, loan-to-value (LTV) ratio, and loan size. Both premiums protect the lender against potential losses if a borrower defaults.

Conditions for Eliminating FHA Mortgage Insurance Premiums

The ability to eliminate FHA Mortgage Insurance Premiums (MIP) depends on when the FHA loan was originated. For loans with case numbers assigned before June 3, 2013, the Annual MIP can automatically cancel once the loan’s unpaid principal balance reaches 78% of the original property value, based on the initial amortization schedule. For loans with terms greater than 15 years, the Annual MIP must also have been paid for at least five years before cancellation. For 15-year loans originated before this date, only the 78% LTV threshold applies.

For FHA loans with case numbers assigned on or after June 3, 2013, Annual MIP cancellation is tied to the original loan-to-value (LTV) ratio. If the original down payment was 10% or more, Annual MIP can be canceled after 11 years of on-time payments. However, if the original down payment was less than 10%, Annual MIP is generally required for the entire life of the loan. Maintaining a good payment history with no significant delinquencies is a prerequisite for MIP cancellation in all scenarios.

The Process for Canceling FHA Mortgage Insurance Premiums

Once a borrower believes their FHA loan meets the eligibility criteria for MIP cancellation, the next step involves understanding the procedural aspects. For loans originated before June 3, 2013, where cancellation is based on reaching a 78% loan-to-value (LTV) ratio, the process is generally automatic. The mortgage servicer is responsible for monitoring the loan’s amortization and should cease collecting the Annual MIP once conditions are met. If premiums continue despite meeting the criteria, the borrower should proactively contact their loan servicer to request removal.

For loans originated on or after June 3, 2013, where MIP cancellation is possible after 11 years with an initial 10% or more down payment, the cancellation is also typically automatic once the 11-year period concludes and payment history is satisfactory. If a borrower has made additional principal payments on a loan originated before June 3, 2013, and believes they reached the 78% LTV threshold earlier, they may need to initiate the process by contacting their servicer. While a new appraisal is generally not considered by the FHA for MIP cancellation, demonstrating a significantly lower LTV through prepayments might prompt a review for eligible older loans.

Refinancing Your FHA Loan

Refinancing an FHA loan offers an alternative pathway to eliminate FHA Mortgage Insurance Premiums (MIP), especially when direct cancellation under FHA rules is not possible or desirable. A common strategy involves refinancing the FHA loan into a conventional loan. This effectively replaces the FHA-insured mortgage with a new loan that is not subject to FHA MIP requirements. However, if the new conventional loan has a loan-to-value (LTV) ratio above 80%, private mortgage insurance (PMI) will typically be required, although PMI can be canceled once 20% equity is reached.

To qualify for a conventional refinance, borrowers generally need to meet specific requirements, including a higher credit score, lower debt-to-income ratios, and sufficient home equity. Lenders commonly look for a credit score of 620 or higher, and at least 5% to 25% equity in the home, with 20% equity usually needed to avoid PMI on the new conventional loan. Beyond MIP elimination, refinancing can offer other potential benefits, such as a lower interest rate or a change in loan terms.

Refinancing involves costs similar to those incurred when purchasing a home, typically ranging from 2% to 6% of the new loan amount. These closing costs can include appraisal fees, loan origination fees, and title services. Borrowers should evaluate whether the long-term savings from eliminating MIP and potentially securing a lower interest rate outweigh these upfront refinancing costs. A break-even analysis can help determine how long it will take for the monthly savings to recoup the refinancing expenses.