Unsure Of Mortgage Insurance Law? 5 Facts

Many people are unaware of mortgage insurance law as it applies to their residential home mortgages; most lenders require home buyers to purchase personal mortgage insurance, if their down payment is less than 20% of the purchase price of a home. So, here is a guide that will help you understand mortgage insurance law as it applies to most residential home mortgages.

The Homeowner's Protection Act (HPA) of 1998

The Homeowner's Protection Act (HPA) of 1998 is the federal law that primarily deals with mortgage insurance agencies, lenders and home buyers with regard to personal mortgage insurance. It was passed by Congress to help ensure homebuyers are aware of their rights when purchasing personal mortgage insurance when taking out a residential home loan.

What Loans Are Covered?

In most circumstances, the HPA is applicable to home mortgages that were obtained on or after July 29, 1999; however, it does also address requirements for home loans obtained before that date. HPA is not applicable to VA and FHA government-guaranteed home loans. Furthermore, the law - as it is written in the HPA -does provide for different requirements for loans that may be classified as high risk type loans. But, the HPA does not define or explain the standard to be used in determining what actually constitutes a high-risk loan.

HBA specifically left that task to Fannie Mae and Freddie Mac -that is to issue guidelines for mortgages used in the secondary or high-risk market. Fannie Mae and Freddie Mac are government chartered organizations, created by Congress, to ensure that mortgage lenders always have enough cash on hand to support sustained purchases of homes on the market. These entities have determined amounts of $252,700 or less are considered conforming loans. Therefore, anything in excess of this amount may be considered as high risk.

Cancellation of Personal Mortgage Insurance under the HPA

Under the HPA, you as a homebuyer have the right to request that the lender cancel their personal mortgage insurance policy when you have paid down your loan balance to an amount that is equal to 80% of the original purchase price, or of the appraised value of the home, whenever you obtained your loan - whichever is less. However, you must also be current on your mortgage payments; this means that you have not been 30 days late with your payment within the last year, before making a request, or 60 days late within the two years before your request.

HPA Laws Governing Automatic Termination

Under the HPA, mortgage loan lenders, or loan servicers, are required to automatically cancel personal mortgage insurance coverage on most loans, once you pay down the loan balance to 78% of the value of your home -- that is if you're current on your payments. If you are not current on your payments, then lenders or servicers are required to cancel your personal mortgage insurance as soon as you do become current. Requirements for high risk loans are the same, except the low balances must be 77% of the home value.

Final Termination of Personal Mortgage Insurance

HPA requires that if your personal mortgage insurance has not been previously canceled or terminated that the lender must remove the requirement for personal mortgage insurance when it reaches the midpoint of the amortization period. For a 30 year loan, that has 360 monthly payments, the midpoint would occur after 180 payments. This part of the law also requires that the homebuyer be current on his/her mortgage payments and not be in default. However, once the loan is brought current, the lender must remove personal mortgage insurance coverage within 30 days.

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