Can You Drop PMI Early If Your Home Value Went Up? Fannie Mae's Rules

Yes, if your loan is owned by Fannie Mae you can ask your servicer to end private mortgage insurance (PMI) before the usual 80% date because your home is worth more now. Fannie Mae's servicing rules let a one-unit home you live in qualify once your balance is 75% or less of the current value (loan 2 to 5 years old) or 80% or less (loan older than 5 years), and a valuation of the home has to confirm it.

This is a different road from the one most people hear about. The federal rules in the standard 80% and 78% PMI rules measure your balance against the home's original value, so a price jump never helps. The current-value route is an investor rule, and it is the only way rising prices can shorten your PMI.

1. What Fannie Mae requires

Fannie Mae's Servicing Guide (section B-8.1-04) says the servicer "must only terminate MI [mortgage insurance] based on current value of the property in response to a borrower-initiated request." The servicer is not allowed to solicit you for this, so nobody will offer it. You have to ask.

For a one-unit principal residence or second home, the loan-to-value (LTV) ratio must be:

For a one- to four-unit investment property, or a two- to four-unit home you live in, the guide requires 70% or less and a loan older than two years.

The two-year waiting period can be waived only when your own improvements raised the value. The guide's examples are kitchen and bathroom renovations or added square footage, and it says repairs that just keep a property maintained are not improvements. You must give the servicer details of what you did.

2. You also need a clean payment record

Value alone is not enough. The guide defines an acceptable payment record as:

• the loan is current when you request termination (last month's payment was made),
• no payment 30 or more days late in the last 12 months, and
• no payment 60 or more days late in the last 24 months.

If the loan is younger than 24 months, the check covers only the time it has existed. If someone assumed the loan, the new borrower needs a 24-month history.

3. The valuation is the proof

The LTV test is not based on a Zillow-style guess or your own opinion. The guide says it must be "evidenced by obtaining a property valuation based on an inspection of both the interior and exterior of the property." The servicer orders it through Fannie Mae's system. If the servicer denies your request, it has to send you the reasons, including the valuation result, within 30 days of the later of your request or receiving the valuation.

4. Worked example

Take the same loan used in the anchor post: $285,000 borrowed against a $300,000 home (95% LTV at the start), 30 years, 6.5%. The principal-and-interest payment is about $1,801 a month. Here is what the home would need to be worth on the current-value route.

At three years the home would have to gain about $66,400 in value. At six years, after the stricter 75% test has given way to 80%, it needs to gain only about $28,000.

Compare that with the original-value route. On this loan, the balance reaches $240,000 (80% of $300,000) at year 10, month 4. A home that is worth $328,000 or more at year 6 lets you ask roughly four years and four months, or 52 months, earlier. If your PMI costs $150 a month (an assumed figure, since premiums vary by loan), 52 months is $7,800 you would not pay.

5. Before you ask, check three things

1. Who owns your loan. The Fannie Mae figures apply to Fannie Mae loans. The CFPB notes that investors such as Fannie Mae and Freddie Mac often write their own cancellation guidelines, which cannot be less favorable to the borrower than the federal minimums. If another investor owns your loan, its thresholds may differ, so ask your servicer whose rules govern your loan and get the thresholds in writing.
2. Whether you are on a different kind of loan. The CFPB says FHA and VA mortgages have different requirements, and that if your lender pays for the mortgage insurance, other rules apply. The Fannie Mae table above is about conventional private mortgage insurance.
3. Who pays for the valuation. The guide describes how the servicer obtains the valuation but, in the version opened for this article, does not state the fee, so ask for the cost before agreeing. Compare it with your monthly PMI charge before deciding.

6. What happens when it is approved

Once you qualify, the servicer has to stop collecting the premium no more than 30 days after the later of your request or the date all criteria were met. It must tell you within 30 days after termination that PMI ended. If the insurer refunds unearned premium, the servicer passes it to you within 45 days after the termination date. Your monthly payment should drop by the amount that had been collected for PMI, unless the premium was financed into the loan.

7. Key takeaways

• Rising home values can end PMI sooner only on the current-value route, and only if you ask.
• On Fannie Mae loans the limit is 75% LTV at 2 to 5 years and 80% after 5 years for a one-unit home you live in.
• You need a spotless recent record: no 30-day lates in 12 months and no 60-day lates in 24 months.
• A valuation with an interior and exterior inspection decides the LTV, not an online estimate.
• On the example $285,000 loan, a $327,983 value at year 6 would put you about 52 months ahead of the original-value date.