How to Drop PMI on an FHA Loan in 2023

Private mortgage insurance (PMI) is an extra cost many homebuyers with smaller down payments face when getting a mortgage. With an FHA loan, this insurance is called mortgage insurance premiums (MIP).

FHA loans require both upfront and annual MIP, adding hundreds per month to your mortgage payment. The good news is you can request to stop paying monthly MIP once you reach 20% equity in the home. This guide will explain how to drop PMI on an FHA loan.

When Can You Cancel FHA Mortgage Insurance?

The ability to cancel FHA MIP depends on two key factors

• When you got the loan – FHA policy on dropping MIP has changed over time Loans opened before 2013 have different rules vs newer loans

• Your equity – To cancel FHA mortgage insurance, you’ll need to build up to at least 20% equity in the home.

Here’s an overview of the cancellation policies based on when your FHA loan originated:

• Pre-2013 – MIP cancels automatically once you reach 78% loan-to-value (LTV) ratio
• 2013 to 2016 – MIP cancels automatically once you reach 78% LTV ratio
• 2016 to Present – MIP cancels automatically once you reach 80% LTV ratio, or 78% LTV after 12 years

As you can see, the equity threshold to cancel FHA mortgage insurance has crept higher over the years. But the central requirement is getting your loan balance down to 80% or less of the home value.

Reaching this point through regular payments, lump sum payments, or home price appreciation will eventually trigger FHA MIP cancellation.

How to Cancel FHA MIP

If you meet the LTV requirements, there are just a few simple steps to dropping PMI from your FHA loan:

1. Request an appraisal – Getting an appraisal is key to proving you have 20% equity. Contact your lender to ask for a new appraisal.

2. Review your options – Once you have the appraisal, ask your lender to review your loan terms and home value. They can tell you if you’re eligible for FHA MIP cancellation based on your equity.

3. Complete request form – If eligible, your lender will have you sign a form requesting PMI cancellation. Submitting this starts the process.

4. Get confirmation – Your lender will confirm when they’ve terminated your MIP. You’ll see the lower monthly payment starting the following month.

That’s the high-level process. But let’s look at some steps in more detail:

Check Your Home Value

As mentioned, the key to dropping FHA MIP is your equity position. And equity equals:

Home Value – Loan Balance

An appraisal gives you an updated home value. But there are other ways to estimate your equity before requesting a formal appraisal:

• Check home prices of recent sales in your neighborhood
• Use online home value estimators
• Get a broker price opinion from a local real estate agent

If these estimates show you’re close to 80% LTV, go ahead and ask for the appraisal.

Review Payment History

To cancel FHA mortgage insurance, your loan needs to be in good standing. That means:

• No late payments in past 12 months
• No more than 1 late payment in months 13-24

Check with your lender that you meet the payment history requirements before paying for the appraisal.

Know Your Monthly Savings

Once FHA MIP is canceled, how much will you save each month?

For a $200,000 loan balance at 4.5%, here’s an estimate:

• 0.85% Annual FHA MIP: $158/month
• Monthly savings when canceled: $158

Use an FHA PMI calculator to estimate your potential savings.

Watch for Lender Delays

By law, your lender must terminate FHA mortgage insurance within 30 days of receiving a cancellation request. But some lenders drag their feet.

Follow up with your servicer if it’s been more than 30 days since your request. Submitting a complaint to the Consumer Financial Protection Bureau can also help speed up tardy lenders.

Alternatives to Cancelling FHA Mortgage Insurance

Not everyone will reach the 80% LTV needed to drop FHA MIP, at least not right away. But you still have options to reduce or remove MIP:

Refinance to Conventional Loan

With a refinance, you can swap your FHA loan for a conventional loan. Conventional mortgages allow PMI cancellation at 78% LTV.

Run the numbers to see if the lower PMI makes refinancing worthwhile. Closing costs for a refi can range from 2% to 5% of your loan amount.

Shop around with several lenders when considering an FHA refinance to consolidate PMI costs.

Refinance to Lower FHA Rate

You may also look at refinancing to a new FHA mortgage to get a lower interest rate. This won’t change the MIP cancellation requirements, but could still save money long-term.

Talk to your lender about current FHA refinance rates. Look for at least a 0.5% to 0.75% rate drop to make refinancing worth the upfront costs.

Apply MIP Credits

For FHA loans originated in 2013 or later, lenders are required to cancel your FHA MIP once you reach 78% LTV and have paid annual MIP for 5 years.

But the lender doesn’t have to stop collecting MIP at that point. They can keep charging you and apply credits later. This means you’ll pay more upfront but less toward the end of your mortgage.

Talk to your lender about how they handle MIP cancellation credits if you’ll hit 78% LTV before the 11-year mark.

Make Extra Principal Payments

If your goal is canceling MIP, putting extra toward the principal can help you build equity faster. This works well if you receive occasional windfalls like a tax refund or work bonus.

Say you can pay an extra $500/month toward your mortgage principal. At that rate, you could reach 78% LTV years sooner than just making the regular payments.

Check if your lender charges any prepayment penalties before making lump sum payments. Most conventional and government loans allow extra principal payments without fees.

Apply Home Price Gains

Home values in many markets have climbed sharply in recent years. If your home has increased in value since you bought it, this passive ‘equity boost’ counts when determining if you can drop MIP.

Just be aware of the potential for home prices to dip again. An appraisal provides just a snapshot of your home value. Make sure your LTV ratio has a comfortable cushion before canceling FHA mortgage insurance based on appreciation alone.

Removing PMI from FHA Loans: The Bottom Line

FHA mortgage insurance can add hundreds per month to your mortgage payment for the entire loan term. But you can request to stop paying monthly MIP once your equity reaches 20% of the purchase price.

Work on the following to cancel your FHA mortgage insurance premiums:

• Make regular on-time payments
• Pay extra toward your mortgage principal
• Complete repairs or renovations to increase home value
• Request an appraisal to verify your equity

Stopping FHA MIP through a refinance is also an option. But aim to keep your new mortgage balance close to or below the canceled FHA loan amount to maximize savings.

With the right strategy, you can eliminate mortgage insurance costs from an FHA home loan.