You took out an FHA loan and want to get out of the PMI you pay. While it’s impossible to avoid PMI when you take out an FHA loan, there are ways to get rid of it. Unlike a conventional loan, FHA loans require mortgage insurance premium for the life of the loan. This means you can’t cancel the insurance just because you owe less than 80% of the home’s value. As long as you carry the FHA loan, you pay the insurance. The amount you pay will decrease slightly each year as you pay the principal down, but you’ll always pay a small amount each month for the insurance.
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So how can you avoid PMI? Keep reading to learn some simple tricks.
The Top Way to Avoid PMI
So how do you avoid PMI when you have an FHA loan? You have to refinance into a conventional loan. This is best done once you owe less than 80% of the home’s value, so it will take a little time. If you put the minimum down payment on the home of just 3.5%, it will take a while to get to an 80% LTV. The two things you have working in your favor are appreciation and the ability to make extra payments. With a little luck, you will owe less than 80% of your home’s value quicker than you thought.
Qualifying for a Refinance
If you took an FHA loan to buy your home, chances are you didn’t qualify for conventional financing. FHA loans have less strict guidelines, which helps you get the financing you need. FHA loans typically require:
- 580 credit score
- 31% housing ratio
- 43% total debt ratio
- Stable employment
- Stable income
- No previous defaults on federal loans
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Conventional loans, on the other hand, have stricter guidelines including:
- 680 credit score
- 28% housing ratio
- 36% total debt ratio
- Stable employment
- Stable income
As you can see, you need a better credit score and a lower debt ratio. Since you’ll need to keep the FHA loan until you owe less than 80% of the home’s value, you’ll have time to work on improving your credit and decreasing your debts.
Paying PMI on a Conventional Loan
The good news is that even if you take a conventional loan and need to borrow more than 80% of the home’s value, you will only pay PMI for a short while. Conventional loans allow you to cancel PMI as soon as you owe 80% or less of the home’s value.
Once you reach the required threshold, you can request cancellation of the PMI in writing. The lender must evaluate your request by determining the value of the home and how it compares to the outstanding balance of your loan. If you do owe less than 80%, the lender will cancel the insurance. If you don’t request cancellation, the lender must cancel it by law, once you owe less than 78% of the home’s value.
While FHA loans don’t allow you to avoid PMI altogether, there is a way around it. If you take advantage of the FHA streamline refinance to secure a lower interest rate you will still pay the MIP. The only way to get rid of PMI once and for all is to secure a conventional loan once you are able to improve your credit and/or lower your debt ratio.