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Know your rights for canceling private mortgage insurance

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POSTED December 13, 2012 6:54 p.m.

DEAR BENNY: I want to get the PMI off my mortgage in February of next year, which will be two years from the time of my refinancing. All my payments have been on time. I have communicated with my current mortgage company that I wish to have the PMI canceled and they informed me in writing that I have to wait for two years and that I have to get an appraisal (which I have to pay for) in order to make sure I will have 20 percent equity of the new appraised value.

However, in a previous column on PMI you stated, "... the law now allows you to cancel PMI when you pay down your mortgage so that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was first obtained, whichever is less." It is my understanding from this, and please correct me if I am wrong, that the amount that should be used in calculating the 80 percent equity is the appraised value at the time of the refinancing (two years ago), which in my case was $142,000.

If that is the case, is there anything in writing that I can show my mortgage company to prove to them that this is the law?

I am very worried that the appraisal will come back less than the $142,000 and I will still have to pay PMI.

I have always paid my mortgage on time and have very good credit, and I'm just sick that I will have to continue paying an additional $1,200 a year for nothing. I am a single mother raising my son completely on my own, and I just want to be able to start applying that money to something more concrete. --Linda

DEAR LINDA: For the benefit of my readers, let me first explain what PMI is. It stands for "private mortgage insurance." Mortgage lenders want security that the loan they are making to homeowners will, in due course, be paid in full. Contrary to what many people believe, most mortgage lenders do not want to foreclose on your home; they just want to make sure that you make your monthly payment on a timely basis, and that the home will have sufficient equity when it comes to paying off the loan.

Traditionally, lenders take the position that if you have at least 20 percent equity in your home, that is sufficient security. But what if you get a loan of 90 or even 95 percent of the purchase price? Then, lenders want insurance to pay them for any loss if there is a foreclosure. If you obtain an FHA or a VA loan, you pay the government for this insurance; otherwise, your lender arranges for private mortgage insurance, and you have to pay for this, usually on a monthly basis.

Over the years, this insurance was abused. Homeowners were unable to get this PMI canceled, despite having more than adequate equity. Accordingly, in 1999, Congress enacted the Homeowners Protection Act, also known as the PMI Cancellation Act.

The act applies primarily to residential mortgage loans, and includes single-family homes, condominiums and cooperatives. The requirements of the law vary depending on whether your loan is a high risk (as defined by your lender in the case of a nonconforming loan) or a conforming loan by Fannie Mae or Freddie Mac.

If your loan balance hits 80 percent of the original value when you first obtained the loan and you ask your lender to terminate the insurance, the lender must comply. And in your case that relates back to your refinance loan, not your original loan.

And when your loan to value drops down to 78 percent, cancellation of the insurance is automatic.

However, the lender is not obligated to accept your request for termination if you have a second mortgage or you have had late payments for 30 days or more during the year before you request the cancellation.

If your loan was under Fannie or Freddie, you have the right to terminate after two years if the loan balance is no more than 75 percent of the current appraised value, and after five years if it is no more than 80 percent. Note that I used the words "current appraised value." This is different and generally more favorable to homeowners because where homes do appreciate, you will be able to reach the termination percentages faster.

You may have to obtain and pay for an appraisal. Make sure your lender approves of the appraiser you plan to use; otherwise, you will have to pay another appraiser for the same task.

There is a lot of helpful information on the Internet; one of my favorites is from Jack Guttentag, the "Mortgage Professor." I asked Guttentag your question as to who pays. He responded that it depends on what kind of loan you have. Some lenders will require you to pay for an appraisal, and others will take care of it themselves.

Guttentag also explained that with some loans, there is what is called an "appraisal waiver." According to Guttentag, "the transaction is sufficiently robust from a risk standpoint that no appraisal is required. Fannie and Freddie have routines built into their underwriting engines, Loan Prospector and Desktop Underwriter, that tell a loan officer accessing them whether or not an appraisal can be waived. I am told that these programs were substantially tightened following the crisis, so that few waivers were granted, more recently Fannie's has been liberalized, Freddie's less so.

"These programs are parcel-specific – if two deals are identical except that one parcel is next door to a home that was foreclosed last year, one could get a waiver and the other not.

"Other factors that affect the decision are the borrower's credit score, debt-to-income ratio, type of income documentation, and LTV based on the loan officer's estimate of value. Other things the same, the lower the value, the greater the probability of a waiver."

However, he added, "There is no provision for a waiver on the FHA program because the required down payment is so small that there is little margin for error."

DEAR BENNY: I have a property that I purchased in Philadelphia in 2008 using the first-time homebuyer credit that must be repaid in $500 increments over a 15-year period.

I now have a job offer in California and am considering relocation. A friend of mine is interested in purchasing my home; however, if I sell and make a profit I will be required to pay the remaining balance of the first-time homebuyer credit, which is now $6,500 in full. I do not mind taking a loss on the house and selling it for exactly what is owed at this point.

According to the IRS website, the exception is as follows: "If you sell your main home to an unrelated person or entity, you repay the credit only up to the amount of gain, if any, on the sale. Note: When calculating gain or loss on your main home if you received the credit, you reduce your basis by any remaining amount of the credit. See Publication 551, Basis of Assets, for more information."

With that said, if I sell my home at the current amount owed, will I have to continue to pay anything back? Also, how can I sell the home, without going through a broker or agent since I already have my buyer and the set price? --Zaida

DEAR ZAIDA: Your second question is easy. You don't need a real estate agent or broker since you have a buyer and have agreed on the price.

Find an attorney in your area who handles real estate transactions. That lawyer can draft the sales contract, provide you guidance as to how to move forward with the sale, and in many parts of the country can actually conduct the settlement/closing. Although the attorney cannot represent both buyer and seller, there is nothing wrong with your buyer sharing the costs of the attorney. But the buyer must fully understand that the lawyer is not representing him, and that the buyer might want to consider getting his own lawyer.

The first question is really an accounting issue. If you made no profit, you have no obligation to repay the homebuyer credit. But you have to determine your basis for tax purposes. I can't assist you on this; you really should contact an accountant to assist you in doing the numbers.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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