How to get rid of PMI, bad credit, no income proof, on time mortgage history

[Mohit Madaan]

A very close friend of mine bought a house in 2010 in Stockton, CA area for $330k and i think he got 95% mortgage, so he obviously had $400 or so PMI, mortgage payment stands around $2700. (I couldn't be wrong on some numbers).

Now, the house is showing at $450k according to Zillow and even this friend of mine thinks its worth at least $430k or so.

He is self employed and last couple of years has been just bad experiments in business, so no real income. He has been living on his savings and paying his mortgage always on time.

So couple of questions

a) Can he refinance to get rid of PMI?

b) Does he have to have income proofs to get this sort of refi done?

c) Any chance of using equity to get cash out without PMI, the plan is to use cash out for REI?

Thanks a ton in advance.

[Joseph Zanazan]

One of the advantages of having a conventional loan vs. FHA financing is the mortgage insurance requirements. Conventional loans allow you to drop or cease insurance payments once a certain criteria is reached without having to necessarily pay to refinance out of the existing loan. There are primarily two ways you can go about this situation.

1)Borrower-initiated Cancellation

When a mortgage with PMI reaches an 80% loan-to-value ratio (LTV) based upon the initial amortization schedule or pre-payments, the borrower may make a written request to the lender that PMI be canceled.

2)Automatic Termination

When a mortgage that is subject to PMI reaches a 78% (LTV) as a result of the initial amortization schedule, the PMI must be automatically terminated provided that the borrower is current on payments. If the borrower is not current, the PMI must be automatically terminated when the borrower becomes current; cancellation will take place the first day of the following month. With a 30 year mortgage, it will take eight or ten years on average to reach the point where you can cancel the insurance.

Whats important to keep in mind is that your current property value isn't what the lender would be taking into consideration. Your amortization schedule will determine when your payment history has reached a certain threshold. Your current loan amount, in respect to the initial appraised value of the home at the time of the financing will be the figures the lender will look at. If your property appreciates enough where you feel an 80% LTV ratio can be achieved, then you're subject to the same loan requirement guidelines as you were last time you obtained financing. That includes another appraisal and going through the same income and asset calculations in order to create a complete mortgage backed security, just like you did the initial loan. Another piece of advice, don't use Zillow as your end-all be-all valuation tool. Its almost always inaccurate.