Lenders Mortgage Insurance Regulations

Lenders mortgage insurance is also known as private mortgage insurance or PMI and is extra insurance that lenders often require if a person is borrowing more than 80% of their home's value. In other terms, anyone who purchases a home and makes less than a 20% down payment will normally be required by their lender to pay for lenders mortgage insurance. PMI is important in the mortgage industry as it protects the lender against any loss of money should a borrower default on their loan.

Lenders Mortgage Insurance Requirements

In 1998 a new federal law regarding lenders mortgage insurance was passed, known as the Homeowners Protection Act or HPA. This law requires lenders to disclose information to the consumer about the private mortgage insurance on loans that were obtained after July 29, 1999. The law also has provisions in regard to a consumers request to cancel or terminate lenders mortgage insurance. This law was put in place in order to protect the homeowner from paying unnecessary premiums for lenders mortgage insurance once private mortgage insurance is no longer necessary.

Homeowner's Protection Act of 1998

Before the homeowner's protection act was enacted in 1998, most lenders would allow a consumer to discontinue their lenders mortgage insurance if their loan balance was paid below 80% of the property value and the consumer had a record of consistent payments. However, lenders were not required to disclose the fact that this insurance could be canceled and it was up to the borrower to keep track of the equity of their home and request the discontinuation of the lenders mortgage insurance. The HPA requires lenders to share information about PMI coverage and how long it is required.

Information Lenders Must Disclose

After a person obtains a mortgage through a lender and pays for lenders mortgage insurance, there are three different times during the life of the loan when the lending company must notify the buyer of their rights. The first time is upon closing on the loan. Second, the lender must provide information annually to the consumer about their loan. Finally, when lenders mortgage insurance is cancelled or terminated. The information given to the consumer at these times will depend on what type of PMI is obtained, whether the mortgage is a "fixed rate" or "adjustable rate," and if the loan is considered high risk or low risk.

Terminating Lenders Mortgage Insurance

Lenders mortgage insurance can be terminated three different ways. The first way is by requesting a cancellation once the balance of your mortgage reaches 80% or less of the homes appraised value or original purchase price. Automatic termination happens when a lender automatically cancels private mortgage insurance after the mortgage reaches 78% of the value of your home. Automatic cancellation will only occur if a person is current on their payments. In addition, final termination will happen once a loan reaches the half point of amortization. For example, a 30-year mortgage will reach the final termination point after 180 payments have been made.

The HPA was put in place in order to protect homeowners from overpaying insurance premiums on their mortgages. This law helps regulate lenders and allows homeowners access to more information about their loans.