Cancelling Private Mortgage Insurance (PMI) in California

In a previous blog post, we explained what private mortgage insurance is and how it affects you as a home buyer. Today, we’ll explore the process of cancelling private mortgage insurance (PMI) in California.

In short: Homeowners with a PMI policy in place can usually request cancellation of their policy when the loan-to-value (LTV) ratio falls to 80%. Additionally, loan services are required to cancel a homeowner’s private mortgage insurance when the LTV falls to 78%.

Going forward, we will refer to these as the “request” and “automatic” methods for cancelling PMI in California.

Options for Cancelling PMI in California

Home buyers who make down payments of less than 20% typically have to pay for private mortgage insurance on their loans. These policies protect the lender against losses resulting from borrower default. But it’s the buyer / homeowners who actually pays the premium.

PMI requirements are “handed down” from secondary organizations like Freddie Mac and Fannie Mae. These two organizations buy home loans from lenders and sell them off to investors, via the secondary mortgage market. But they’ll only purchase loans that meet specific requirements, and mortgage insurance is one of those requirements.

So, getting back to the question at hand: How does a California homeowner cancel PMI?

As mentioned above, there are two common methods for cancelling a private mortgage insurance policy in California. It can be done upon request, and it can also happen “automatically.” But in both cases, the current mortgage balance must drop to a certain level relative to the property value.

Requesting PMI Cancellation

In accordance with the Homeowners Protection Act, California homeowners can ask their mortgage loan servicers to cancel PMI when the loan-to-value (LTV) drops to 80%. This occurs when the outstanding loan balance falls to 80% of the original home value.

In this context, the “original value” usually means (A) the contract sales price or (B) the appraised value of the house when you purchased it.

If you have private mortgage insurance disclosure documents on file, you can refer to those to see when your LTV is scheduled to hit 80%. If you don’t have those documents, you can contact your loan servicer to find out. In most cases, the “servicer” is the company that actually sends out the mortgage statements.

There are some other criteria for cancelling a PMI policy:

• You must request it in writing.
• You have to be current on your payments.
• You might have to certify that there are no junior liens on your home, such as a second mortgage.
• The home might have to be appraised again, to make sure the value hasn’t declined below the original value.

So that’s the “request” method to cancel private mortgage insurance in California. Let’s move on to talk about the automatic cancellation or termination, which is also tied to the LTV.

Automatic PMI Termination

Homeowners can also have their PMI cancelled automatically, once the loan-to-value ratio falls to a certain level. The Homeowners Protection Act states that a loan servicer must automatically terminate a PMI policy when “the principal balance of the mortgage is first scheduled to reach 78 percent of the original value…”

It goes on to explain that (once again) the borrower must be current on their mortgage payments. So this requirement applies to both the request method and the automatic method for cancelling private mortgage insurance. Otherwise, the PMI policy would be terminated shortly after the payments are brought up to date.

Different Rules for FHA Loans

Everything mentioned above applies to conventional mortgage loans in particular. A conventional loan does not receive government backing or guarantee. This sets them apart from FHA and VA loans, which do receive federal backing.

(The “private” part of private mortgage insurance indicates that the policy is provided by a private-sector company, as opposed to the government.)

The FHA program also requires mortgage insurance for borrowers. But it works differently from PMI. Unlike a PMI policy, which can be cancelled through the two methods outlined above, FHA mortgage insurance is often required for the full life of the loan.

Most borrowers in California who use FHA loans make down payments below 5%. That’s the primary appeal of this particular program. It allows borrowers to put down as little as 3.5% when buying a house. But those same borrowers usually have to pay an annual FHA mortgage insurance policy for the full mortgage term.