When Can You Drop PMI on an FHA Loan?

Federal Housing Administration (FHA) loans offer an accessible pathway to homeownership for many individuals due to their flexible credit requirements and lower down payment options. A common aspect of these loans is Mortgage Insurance Premium (MIP), which protects lenders from financial loss if a borrower defaults. Understanding how this insurance works, and crucially, when it can be discontinued, is important for FHA loan holders managing their housing expenses.

Understanding FHA Mortgage Insurance

FHA loans include two distinct types of mortgage insurance premiums: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (Annual MIP). The UFMIP is a one-time charge, typically 1.75% of the loan amount, which borrowers usually pay at closing or finance into the loan balance. This upfront premium is generally non-refundable and cannot be “dropped” in the same way the annual premium can.

The Annual MIP is a recurring charge that borrowers pay monthly as part of their mortgage payment. The cost of this annual premium varies, typically ranging from 0.15% to 0.75% of the loan amount, depending on factors such as the loan-to-value (LTV) ratio, the loan term, and the original loan amount.

Conditions for Removing Annual Mortgage Insurance Premium

The ability to remove the Annual Mortgage Insurance Premium from an FHA loan largely depends on the loan’s origination date, as FHA rules underwent significant changes. For loans with a case number assigned before June 3, 2013, the cancellation criteria are tied to the loan’s equity. Annual MIP for these loans can be automatically canceled once the unpaid principal balance reaches 78% of the original loan amount or the initial appraised value, whichever is lower.

Meeting this 78% loan-to-value (LTV) threshold is a key condition for older loans. Additionally, for 30-year loans originated before this date, borrowers must have made at least 60 payments, or five years of payments, for the MIP to be eligible for cancellation. Loans with shorter terms, such as 15-year mortgages, do not have this five-year payment requirement but still require reaching the 78% LTV. This cancellation process is based on the original amortization schedule, meaning extra principal payments made to accelerate equity growth can help reach the 78% LTV sooner.

For FHA loans with case numbers assigned on or after June 3, 2013, the rules for Annual MIP cancellation are different and depend on the initial loan-to-value (LTV) ratio at origination. If the initial LTV was 90% or less, which typically means a down payment of 10% or more, the Annual MIP will be collected for 11 years. After this 11-year period, the Annual MIP automatically ceases, assuming the borrower has maintained timely payments.

If the initial LTV was greater than 90%, signifying a down payment of less than 10%, the Annual MIP is generally required for the entire life of the loan or for its first 30 years, whichever comes first. For these loans, there is no automatic cancellation even if substantial equity is gained over time.

The Process for Removing Annual Mortgage Insurance Premium

Once a homeowner determines they meet the specific eligibility criteria for Annual MIP removal based on their loan’s origination date and LTV, the next step involves initiating the process with their loan servicer. While some eligible loans may see automatic cancellation, homeowners should contact their mortgage servicer directly to inquire about their specific eligibility and to request a review of their loan.

The loan servicer will then verify several key pieces of information. This includes reviewing the loan balance, the original appraisal, and the borrower’s payment history to confirm that all conditions for cancellation have been met. In some cases, especially if the removal is based on reaching a certain LTV, the servicer might require a new appraisal to confirm the current market value and updated equity position of the home. Upon successful verification and approval, the servicer will cease charging the monthly Annual MIP, which will be reflected in subsequent mortgage statements.

Refinancing as an Alternative

For many FHA loan holders, particularly those with loans originated after June 3, 2013, and an initial loan-to-value ratio greater than 90%, direct cancellation of the Annual MIP is not possible. In such scenarios, refinancing the FHA loan into a conventional loan often presents the only viable option to eliminate the ongoing mortgage insurance premium. This strategy involves obtaining a new loan that pays off the existing FHA mortgage, thereby removing the FHA’s MIP requirement.

To qualify for a conventional refinance, borrowers typically need to meet specific requirements, which generally include a good credit score, a manageable debt-to-income ratio, and sufficient equity in their home. A common threshold for conventional loans is having at least 20% equity in the home, which allows borrowers to avoid private mortgage insurance (PMI) altogether. Even if a borrower refinances into a conventional loan with less than 20% equity and thus incurs PMI, conventional PMI can usually be canceled once the homeowner reaches 20% equity, offering a path to eventual removal that FHA MIP often does not. While refinancing involves new closing costs, the long-term savings from eliminating the FHA’s Annual MIP can make it a financially beneficial decision for many homeowners.