Appraised Values: PMI Cancellation and Home Buying
by Thomas in Peabody, MA and by Jeana in Gainesville, FL
Ask Kate about appraised value problems that arise during the PMI cancellation process and home buying: Thomas from Peabody, MA received information from his lender regarding appraised values and PMI cancellation that he feels doesn't jive with the federal law contained in the Homeowners Protection Act.
Jeana is buying a condominium and finds her two appraisals are $20,000 apart from each other. What is the real value of the home?
PMI Cancellation From Paydown - What Is the Value By Thomas from Peabody, MA
I'm trying to determine if it would be worth asking my servicer, CitiMortgage, to order an appraisal and make a serious attempt at cancelling my private mortgage insurance.
I've paid down principle over 26 months and am now at "78% LTV based on original value of property", says the letter from CitiMortgage.
The letter continues "A full appraisal must be completed to confirm that the value of your property has not declined since your loan closed. The original value (lesser of purchase price or appraised value) was 318K. If there has been a decline in value from the original appraised value...your loan will not be eligible for PMI cancellation regardless of the LTV based on new appraisal."
My original appraisal was S340K, well above purchase price. Prices have generally risen about 5% in past two years. But it sounds like CitiMortgage can refuse cancellation if current appraisal is $1 less than 340K.
I'm familiar with the Homeowners Protection Act (HPA). Is their letter language and policy an outgrowth of the new law initiated by the Mortgage Insurance Companies of America (MICA) that passed in 2012? Something doesn't seem right here.
Ask Kate answers: PMI Cancellation From Paydown - What Is the Value
Federal law, specifically The Homeowners Protection Act, restricts lenders from cherry picking which mortgages they want to make eligible for MI removal.
To understand the law, it is important to make the distinction between cancellation and termination because the removal of mortgage insurance is dependent on appraised value in only one of these procedures.
So let's take a look at the differences between cancelling and terminating PMI.
Based on federal law, if your mortgage closed on or after July 29, 1999, mortgage insurance cancellation and termination policy is as follows:
- PMI Cancellation I: Homeowners can request for MI to be cancelled on the date the mortgage balance is scheduled to reach 80% of the home's original value. (The date comes from the original amortization schedule.) But the property cannot have declined in value.
- PMI Cancellation II: If extra principal payments have reduced the balance, the homeowner may be eligible for earlier cancellation. But the property cannot have declined in value.
- PMI Termination I: Lenders are required to automatically terminate PMI on the date a mortgage balance is scheduled to reach 78% of the home's original value. (The date comes from the original amortization schedule.) The value of the home is not called into question, even in the case of falling appraised values.
- PMI Termination II: Final PMI termination must occur when homeowners reach the midpoint on the original amortization schedule, even if that occurs before the 78% date. For example, in a 30 year mortgage, the end of year 15 would be the midpoint.
If you have reached 80% loan-to-value (or less) by means of extra principal payments, it seems to me that you are falling under PMI Cancellation II
. Thus you would be subject to an appraisal to show that your property value has not declined.
By the way, based on your letter, I think the value that will be compared to today's appraisal is $318k, not $340k. But do ask the lender to clarify and confirm since I am not privy to the details of your financing.
Before contacting your lender, you should also know this. There are a couple of loopholes that lenders can use to avoid removing PMI. Read about the loopholes at How Do I Cancel PMI
Appraisal Discrepancies By Jeana S. from Gainesville, FL
We are in the process of purchasing a condo unit in Florida.
The first lender appraised the property $20,000 higher than the second appraiser. First appraiser was out of town, second was local.
The value of the appraisal is good for us to qualify for loan but I am questioning the vast difference in the appraised value from different banks.
The first lender denied the loan because of insurance issues they had with condo associations, second lender is okay with those.
Should I be concerned about this and does it really matter or affect future sale of property?
Ask Kate answers: Appraisal Discrepancies
Unless you plan to sell the condo immediately, I wouldn't lose too much sleep over the difference between the two appraised values. After all, an appraisal is merely one person's opinion on a given day.
Thankfully, the lower appraised value was sufficient to satisfy the lender. But I also understand how irksome it can be when an appraiser ineptly comes up with a ridiculously low appraised value. You can read about my personal experience with a low appraisal at Disputing Low House Appraisals
However, the loan denial over insurance issues would be
of concern to me. I would look into the problem to confirm that the homeowner association's insurance policy provides adequate coverage.
You could also bring this up at the next HOA meeting. Correcting the issue will benefit all of the condominium homeowners by making the units easier to refinance and sell in the future.
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