WHEN LOAN-TO-VALUE RATIO DROPS BELOW 80% - JUST ASK A LENDER

Have you ever wondered how your friends and relatives can afford to buy their nice houses and condos when you know they had hardly any savings for a down payment?

Unless they obtained a VA or FHA mortgage, they probably borrowed 90, 95, 97, 100, or even 103 percent of their home's purchase price, thanks to PMI. Private mortgage insurance enables mortgage lenders to make these high-risk loans with safety.

If the borrower defaults and the lender suffers a loss, the PMI insurer steps in to pay the top, or riskiest, portion of the mortgage, above the customary lender's maximum "safe loan" of 80 percent loan-to-value ratio.

Who can get a low or no down payment PMI mortgage?

Because PMI mortgages are risky for lenders, they require good income and good credit. There are two steps. The first step is to be approved by the mortgage lender. The second step is to be approved by the PMI insurer.

Most mortgage lenders refer their PMI business to one or two PMI insurers (there are only seven PMI companies in the nation). Because the originating lender knows the PMI qualification standards, after obtaining approval by the originating lender there usually is no problem obtaining PMI.

How much does PMI cost the borrower?

PMI payment plans vary widely among mortgage lenders. Some lenders include PMI in their loan interest rate at no extra charge. But PMI borrowers can be certain they won't obtain the lowest interest rate by making a low or no down payment. The 103 percent PMI mortgages even include closing costs.

Other PMI lenders charge a PMI fee at the time of loan closing, plus a monthly PMI premium, which varies with the amount of the insured mortgage. These fees range from $20 to $100 per month, sometimes more for larger mortgages. PMI borrowers should ask about alternatives for PMI payments, which can vary by lender, such as obtaining a second mortgage or a home equity loan instead of PMI.

How long is PMI required?

The answer to this question depends on the mortgage lender. At the time of loan closing, lenders are required to give borrowers a disclosure stating when the PMI premium can be cancelled.
If the PMI premium is included in the interest rate, without a specific PMI premium each month, the extra PMI cost lasts as long as the mortgage. To illustrate, suppose 6 percent is the market interest rate. But your lender might quote a 6.25 percent interest rate for a low or no down payment mortgage without any extra PMI charge.

However, most PMI lenders charge an up-front PMI fee plus a monthly PMI premium such as $100, sometimes more.

This monthly PMI charge will be required until the loan balance declines below a specified ratio. But this gets very tricky and deceiving. Some lenders require the loan balance to drop below 80, 78, or 75 percent loan-to-value ratio.

The problem is many lenders require these loan-to-value ratios to be based on the home's purchase price, without considering increased market value due to (1) improvements made by the borrower and/or (2) market value appreciation, currently at a 6 percent national average.
Smart PMI borrowers realize, after a few years of home ownership, their loan-to-value ratio is well below 80 percent and the mortgage lender no longer needs PMI protection in the rare event of foreclosure. But many lenders are reluctant to allow PMI cancellation because of the loss protection it offers lenders.

Federal law doesn't help PMI borrowers.

In 1998, Congress enacted the Homeowners Protection Act. It was supposed to protect PMI mortgage borrowers from nasty lenders who refuse to cancel unnecessary PMI premiums. But this ineffective law hasn't helped one PMI borrower yet and it won't help any until 2009.
Here's why. This law says PMI mortgages originated after July 29, 1999 must have the PMI cancelled when the loan-to-value ratio declines to 78 percent.

However, don't be fooled. Depending on the PMI home loan's interest rate, it will take 10 to 15 years for the loan balance to drop to 78 percent of the home's market value at the time of purchase.

The reason is this bad law does not take into consideration the home's rise in market value due to the borrower's capital improvements or the market value appreciation.

The adverse result is PMI insurers continue to collect the monthly premiums even when the loan-to-value ratio is well below a safe 80 percent.

"Good guy" lenders Fannie Mae and Freddie Mac will cancel PMI if you ask.

Fortunately, the nation's two largest buyers of home loans in the secondary mortgage market are "good guy" lenders. Their PMI policy is to order their loan servicers to cancel PMI, upon the borrower's request, when the loan-to-value ratio drops below 80 percent if the borrower has an on-time payment record for the last two years.

Fannie and Freddie own millions of PMI mortgages. While some of their loan servicers are very cooperative when asked by the borrower to cancel PMI, others can be extremely nasty. PMI borrowers who ask their loan servicer "who owns my loan" can rejoice if the answer is Fannie Mae or Freddie Mac.

How to request PMI cancellation.

If you think your PMI loan-to-value ratio is below 80 percent of your home's current market value, you can save hundreds or even thousands of wasted PMI dollars every year. But you must ask. If you are rejected, ask again. Ask, ask, ask, ask, ask until you get the answer you want.

If you have a cooperative mortgage loan servicer when you request PMI cancellation, you will be given the names of several approved appraisers you can hire to appraise your home's current market value. The appraisal cost will be around $350. But the money will be well spent if it enables you to cancel your PMI premiums.

What to do if your PMI cancellation request is refused.

If you are not among the lucky home loan borrowers whose mortgage is owned by Freddie or Fannie, if your request is rejected, you have little recourse to get your PMI cancelled. Unless your state's law regulates PMI cancellation, mortgage lenders can set their own unreasonable PMI cancellation rules.

But you have several alternatives. After you have an appraisal from an appraiser recommended by your loan servicer, if your loan-to-value ratio is below 80 percent, keep complaining up the loan servicer's "chain of command" until you reach the top person. Always be very polite, but persistent.

If that doesn't work to get your PMI cancelled, you can refinance with a lender who doesn't require PMI. However, refinancing can be a hassle.

Another alternative, suggested by readers, is to pay your monthly PMI premium each month under protest and then sue the loan servicer in the local Small Claims Court for a refund each month because the PMI is no longer necessary. The loan servicer is unlikely to show up and you will probably win a default judgment. After a few months of this, most loan servicers give up and cancel unnecessary PMI.

Conclusion.

PMI enables millions of U.S. home buyers to purchase their residences with little or no down payments. However, after a few years, PMI is no longer necessary when the loan-to-value ratio drops below 80 percent.

But many lenders refuse to cancel PMI because it costs them nothing and they feel more secure. That's when PMI borrowers should become aggressive to get rid of unnecessary PMI either by refinancing elsewhere or hassling their loan servicers to cancel expensive PMI premiums.

(Information courtesy of Robert J. Bruss - Inman News)