Can You Remove PMI From an FHA Loan?

Federal Housing Administration (FHA) loans offer an accessible path to homeownership, featuring lower down payment requirements and more flexible credit criteria compared to conventional mortgages. A distinguishing characteristic of FHA loans is the mandatory Mortgage Insurance Premium (MIP), which protects lenders against potential losses if a borrower defaults. Many homeowners with an FHA loan eventually wonder if this ongoing premium can be eliminated from their monthly mortgage payments. While conditions apply, it is often possible to remove MIP from an FHA loan, potentially leading to significant long-term savings.

Conditions for FHA Mortgage Insurance Premium Removal

The ability to remove Mortgage Insurance Premium (MIP) from an FHA loan largely depends on the loan’s origination date, specifically whether it was endorsed on or before June 3, 2013, or after this date. This distinction is crucial as FHA policy underwent significant changes, impacting how and when MIP can be cancelled.

For FHA loans with case numbers assigned on or before June 3, 2013, MIP can be removed once the loan-to-value (LTV) ratio reaches 78% of the original purchase price or appraised value, whichever was less at the time of origination. This removal is also contingent on a good payment history, requiring at least five years of on-time payments for longer loan terms. If these conditions are met, the mortgage servicer should automatically cancel the MIP.

FHA loans originated after June 3, 2013, operate under different and more restrictive MIP cancellation rules. For these loans, the initial loan-to-value at closing primarily dictates whether MIP can ever be removed. If the initial LTV at origination was 90% or less, the MIP can be cancelled after 11 years of on-time payments.

However, if the initial LTV for a loan originated after June 3, 2013, was greater than 90%, the Mortgage Insurance Premium is permanent. In such cases, the only way to eliminate MIP is by refinancing the FHA loan into a different loan type.

Loan-to-value (LTV) is calculated by dividing the current outstanding loan balance by the property’s original appraised value or purchase price, whichever is lower. For FHA purposes, the upfront mortgage insurance premium (UFMIP) is not included in this calculation. For FHA loans, a new appraisal does not factor into the calculation for automatic MIP removal based on LTV.

The Removal Process

Once a homeowner determines their FHA loan meets the conditions for Mortgage Insurance Premium (MIP) removal, the next step involves contacting their loan servicer. The process begins by contacting the servicer to inquire about MIP cancellation eligibility. This initial contact can be made via phone or a written request.

Homeowners should request a review of their loan for MIP cancellation, providing any necessary information the servicer might require to verify eligibility. This could include confirmation of payment history and the original loan details. For loans originated on or before June 3, 2013, where LTV is a factor for removal, the servicer may require a new appraisal to confirm the loan has reached the 78% LTV threshold.

The homeowner is responsible for the cost of this new appraisal, which can range from $400 to $800, depending on location and property characteristics. The appraisal report helps demonstrate that sufficient equity has been accumulated, potentially due to principal payments or property appreciation. Once the appraisal is completed and submitted, the servicer will review all documentation to make a determination.

The servicer’s review process and decision timeline can vary, taking several weeks to a couple of months. Upon approval, the servicer will cease collecting the monthly MIP, and this change should be reflected in subsequent mortgage statements. Homeowners should monitor their statements to ensure the MIP has been removed after receiving confirmation from their servicer.

Alternatives When FHA Mortgage Insurance Premium Cannot Be Removed

If direct FHA Mortgage Insurance Premium (MIP) removal is not possible, homeowners have alternative strategies to eliminate the premium. The most common and most effective alternative is refinancing into a conventional loan.

Refinancing involves obtaining an entirely new loan to pay off the existing FHA mortgage. This new conventional loan requires higher credit scores and lower debt-to-income ratios compared to FHA loans. To avoid private mortgage insurance (PMI) on a conventional loan, borrowers need to have at least 20% equity in their home.

PMI on conventional loans differs from FHA MIP. PMI can be cancelled upon borrower request once 20% equity is reached, or it automatically terminates under the Homeowners Protection Act (HPA) once 78% LTV is achieved. This provides more flexibility than the stricter FHA MIP rules. However, refinancing does come with associated closing costs, which can range from 2% to 6% of the new loan amount, adding several thousands of dollars to the upfront expense.

Homeowners should weigh these costs against the long-term savings from eliminating MIP, and consider current interest rates, as a higher rate on the new loan could offset the benefit of removing the premium. Another alternative is selling the home. Selling the property eliminates the FHA loan and its associated MIP, as the loan is paid off during the sale transaction.