How to Get Rid of PMI on an FHA Loan

FHA loans offer an accessible path to homeownership, often with lower down payment requirements and more flexible credit criteria compared to conventional mortgages. This accessibility comes with a requirement for mortgage insurance premiums (MIP), which protect lenders against potential losses if a borrower defaults on their loan. Understanding these premiums and the conditions under which they might be removed is an important aspect of managing an FHA-insured mortgage.

Understanding FHA Mortgage Insurance Premiums (MIP)

FHA Mortgage Insurance Premiums (MIP) serve a similar purpose to private mortgage insurance (PMI) on conventional loans. Unlike PMI, which is typically required only when a conventional loan’s down payment is less than 20%, FHA MIP is a mandatory component for all FHA loans, regardless of the down payment amount. This insurance mitigates risk for lenders, allowing them to offer loans with more lenient qualification standards.

FHA MIP consists of two parts: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (AMIP). The UFMIP is a one-time fee, currently 1.75% of the base loan amount. This premium is typically paid at closing, though borrowers often finance it by adding it to their loan amount, increasing the principal balance.

The Annual Mortgage Insurance Premium (AMIP) is a recurring monthly charge. Lenders calculate the AMIP as a percentage of the loan’s outstanding balance. This percentage varies based on loan amount, down payment size, and loan term. For example, a 30-year fixed-rate FHA mortgage with a minimum down payment might have an annual MIP around 0.55% of the loan amount, which is then divided by 12 for the monthly payment.

A significant difference between FHA MIP and conventional PMI lies in their duration. While PMI on conventional loans can typically be canceled once a homeowner reaches 20% equity, FHA MIP often remains for a much longer period, and for many loans, it is required for the entire life of the loan.

Determining Eligibility for FHA MIP Cancellation

The ability to cancel FHA Mortgage Insurance Premiums (MIP) depends significantly on the loan’s origination date and the initial loan-to-value (LTV) ratio. Policies regarding MIP duration have changed over time, meaning that eligibility criteria vary for different loans.

For FHA loans originated before June 3, 2013: If the loan’s initial LTV was at or below 90%, the annual MIP could be canceled after 11 years. If the initial LTV was greater than 90%, the MIP would generally remain for the life of the loan. Some loans originated in this period could also see MIP automatically terminate once the loan balance reached 78% of the original appraised value, provided they had a good payment history.

For FHA loans with case numbers assigned on or after June 3, 2013: If the borrower made an initial down payment of at least 10% (meaning the initial LTV was 90% or less), the annual MIP is required for 11 years. However, if the initial down payment was less than 10% (initial LTV greater than 90%), the annual MIP is generally required for the entire life of the loan.

Maintaining a good payment history is a general requirement for any form of MIP cancellation. Lenders typically look for a record of on-time mortgage payments, often requiring no 30-day delinquencies in the preceding 12 to 24 months. For loans where cancellation is tied to a specific LTV, such as reaching 78% equity, the LTV is usually calculated based on the original appraised value or sales price, whichever was less, at the time of loan origination. A new appraisal to reflect current market value typically does not directly affect FHA MIP cancellation eligibility on existing FHA loans.

The Cancellation Process for Eligible FHA Loans

Once a homeowner determines their loan meets FHA MIP cancellation eligibility, they can initiate the process. For loans that qualify for automatic MIP termination based on time or a specific loan-to-value (LTV) threshold, the mortgage servicer should ideally handle the cancellation without direct borrower action. Homeowners should proactively monitor their loan statements and confirm that MIP payments have ceased once the conditions are met.

The loan servicer is the primary point of contact for requesting MIP cancellation or inquiring about its status. Homeowners should gather their loan number and property address before contacting the servicer. The servicer can confirm the loan’s origination date, initial loan-to-value, and payment history, all of which are pertinent to determining eligibility. If the servicer confirms eligibility for cancellation, they will outline any specific forms or documentation required to process the request.

For FHA loans originated on or after June 3, 2013, with less than a 10% down payment, direct MIP cancellation is not an option. For these loans, the MIP is mandated for the entire life of the loan. The most common and often only effective method to eliminate FHA MIP is to refinance the FHA loan into a conventional mortgage. This approach allows the homeowner to replace their FHA loan with a new loan type that has different mortgage insurance rules.

When considering refinancing to a conventional loan, the primary objective is typically to secure a loan that does not require private mortgage insurance (PMI). This generally means having at least 20% equity in the home, resulting in an 80% or lower LTV for the new conventional loan. While the refinancing process involves a new application, credit checks, and potentially a new appraisal to establish current home value, it can lead to significant monthly savings by removing the ongoing mortgage insurance payment. Homeowners should compare potential interest rates and closing costs of a conventional refinance against their current FHA loan to assess the overall financial benefit.