Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About FHA Loans PMI Removal
With so many companies to choose from and hundreds of loan options, the mortgage process can be confusing and costly.
When it comes to the FHA program it is one of the most widely used mortgage loan programs out there.
Especially for first time home buyers where they can make a minimum down payment of 3.5%.
However, making less down payment would add something called private mortgage insurance or PMI for FHA loans. In this post, we will learn tips for FHA loans PMI removal.
What is PMI on FHA Loans?
Many people are still confused or unaware of private mortgage insurance (PMI) on FHA loans. PMI is applicable to FHA loans where you have less than 20% of the equity in your home.
For example, if you are buying a house worth $100,00 and you are making a down payment of $20,000 and getting a loan for $80,000, that means you are putting your share of $20,000 in your house, meaning you have 20% equity in your house.
The PMI protects the lender if you stop making payments on your loan. There are two versions of PMI. In the case of FHA loans, no matter what amount of down payment you are putting, you will get PMI.
PMI is directly proportionate to your down payment As FHA requires a minimum of 3.5% and you put 3.5% as a down payment, you are going to have PMI as long as you have that mortgage.
(Private Mortgage Insurance) PMI Removal
The only way for FHA loans PMI removal is through refinancing and it doesn’t mean that you have to jump into refinancing.
Before you refinance into a conventional loan program to remove the PMI, you have to make sure you look at these important things.
1) Increase your Credit Score: If you got the FHA loan because of your low credit, then you need to work towards increasing your credit score to be able to qualify for the conventional mortgage refinance.
Usually, the credit score required for the conventional loan is 640 or above. However, that depends on the lender you are working with.
Once you have your credit score more than the required range, you can now refinance into a conventional mortgage and remove the PMI for an FHA loan.
2) Build Equity: If you got an FHA loan because of a low down payment, you have to be sure that your equity in the house is more than 20% of your property value before you refinance into a conventional loan.
Or your property value should be appreciated enough to cover your share of equity for up to 20%. If that is one of the ways for FHA loans PMI removal.
3) Go for Conventional With PMI: Even if you don’t have enough down payment, you could still go for a conventional loan with a minimum of 3% down payment and PMI.
The difference between the FHA loan PMI and the Conventional loan PMI is that FHA loan PMI remains till the life of the loan or till the time you refinance into any other program, however, the conventional loan PMI can be removed once you have the 20% equity in your house provided you gave a good credit score.
Conclusion
So for FHA loans PMI removal, you need to have, one, 20% equity in your property and, two, you need to refinance into a conventional loan.
Many people assume that they are at a great FHA rate, however, what they don’t understand is that they are also paying an additional 5 to 8 percent more in form of a PMI which they can avoid if they opt for a conventional loan.
