Mortgage Insurance on a Fannie Mae Homestyle Loan

[Bobby Douglass]

Hello All,

My family and I recently purchased and renovated a house in Birmingham, Al using the Fannie Mae Homestyle loan. I have to say this is an amazing loan, and have been very pleased with how smoothly everything has gone (including the renovations). We are finally moved in and loving every second of it! 

Unfortunately, since I paid 5% down I have to pay mortgage insurance. Fortunately, the ARV (done by a 3rd party appraisal company on behalf of the lender) of the property gives me right at 20% equity in the property. This is really a conventional loan, and I was under the impression that once 80% LTV is reached that I can request that my PMI is dropped, and once 78% LTV is reached my lender is required to drop it.

My question is what is required to prove this to my lender. Obviously a refi (after any required seasoning period) would take care of the problem, but I want to avoid that if possible. It seemed that one of the benefits of this homestyle loan was that my lender would accept the appraisal of the property that they required as a basis to calculate LTV when it comes to mortgage insurance. Should I just try and order a new appraisal in a few months?

I am in communication with my lender, but didn't know if anyone else had any insight on this topic. Thanks in advance for the advice!

Sincerely,

Bobby Douglass

[Ryan Murphy]

@Wayne Brooks is correct, and I believe this is for all conventional loans (standard and HS renovation) - it doesn't matter what a new appraisal would come in at (higher or lower), the PMI is based solely on the original value that the loan was based on. So if you paid 5% down, your LTV is 95% of THAT appraised value, and you have to wait until your LTV comes down to 78% of THAT appraised value before PMI can be dropped. Doesn't matter what the market does in the meantime. I do not believe you can get a new appraisal to drop PMI even if it comes in at 75% or at any lower LTV, but confirm this with your lender.

I don't think you can request PMI to be dropped at 80% LTV. The 80% LTV rule you are talking about only applies to a purchase where you are putting 20% down to begin with. This is why it can make sense to pay the 20% down and then get a HELOC on TOP of the 1st mortgage, because then you can still get the same total loan amount, but split between two loans, and avoid paying the PMI on the first. HELOCs can tend to have a bit of a higher rate, but the math generally works out that your payments are lower, and there are other advantages to having a HELOC (often they are interest only for 10-15 years, which reduces your monthly debt when calculating debt to income for your next purchase, and you can pay the HELOC down to 0 but still pull all the cash out again at any time ... it's a line of credit). Sometimes you can use a HELOC as part of the original purchase to avoid paying PMI to begin with, but this depends on the bank.

If you look at an amortization schedule, you can easily determine the exact month you can drop PMI, and calculate how much the PMI will cost you. Depending on your rate, it should be somewhere around 9-12 years, I think ... I haven't done the math in a while.

There is an option at the beginning of the loan process to pay a PMI premium that amounts to 2.15% of the total loan (check the rate with your lender). This is an up-front cost you can pay that eliminates PMI payments. When we did our HS renovation loan, I had this calculated as about 4-4.5 years worth of PMI payments.

So, if you know you will be holding onto the property long term (and not refinancing), then it may be worth paying the PMI premium up front to save some money longer-term. It also helps with your debt to income ratio if you are looking to get more loans for more properties, as the monthly PMI expense is no longer part of your monthly debt payment.

In my calculations, paying the PMI premium was a better return than paying points to reduce the rate.

However, I'm pretty sure that you can't retroactively choose to pay the PMI premium - this is a decision you have to make before finalizing the loan. I know this doesn't help you in your current situation, but it's good to know for anything you do in the future.

I'd say your best shot at getting rid of the PMI is to pay down the principal to 78% now (borrow money short term if you have to) and then get a HELOC for the difference (pay back any borrowed money as well - should take 1-2 months to get the HELOC). You should be able to calculate the monthly amounts to compare to what you're paying now, and I'd bet you'd end up ahead every month.

Good luck!