Private Mortgage Insurance (“PMI”) is the insurance policy that protects your lender in case you, the borrower, default on your loan. If your down payment on a home is less than 20 percent of the appraised value or sale price, your lender will require you to get mortgage insurance. As a borrower, you pay the premiums, and the lender is the beneficiary. Until April 30, 2013, borrowers had the option of notifying the bank when their loan-to-value (“LTV”) on their loan reached Eighty Percent (80%), at which time the lender had to remove the PMI from the loan and you as the borrower no longer had to pay the PMI monthly payments. If you did not notify the bank, federal law required the lender to remove the PMI when your loan-to-value reached Seventy-Eight Percent (78%).
That was under the old rule. The new FHA guidelines allow the FHA to demand borrowers to pay PMI through the life of their loans. There is no more mandatory removal of PMI at Seventy-Eight Percent (78%) LTV. This will result in huge increases in total payments made by borrowers over the life of their loans. The new changes take effect for loans assigned an FHA number on or after June 3, 2013. Those new rules include some loans where the FHA will allow the PMI to be lifted after the borrowers meet certain LTV levels. (See the FHA’s MIP Mortgagee Letter).
FHA Commissioner Carol Galante, when announcing the changes to the FHA policy, recently stated: “These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs. In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.” (Click to read more.)
No matter what the reason behind the changes, you should discuss the effect that these changes will have on borrowers payments over the life of their loans with your attorney.