PMI and the Homeowners Protection Act on the SAFE Exam

Mortgage insurance is one of those topics the SAFE MLO test comes back to from several angles. The Homeowners Protection Act of 1998 (HPA) is on the content outline under Federal Mortgage-Related Laws, which is 24% of the national test, and mortgage insurance also shows up in loan program questions, LTV math, and disclosure timing. The exam expects you to know when borrower-paid private mortgage insurance (PMI) can be canceled, when it must end on its own, what lender-paid MI changes, and why FHA, VA, and USDA loans play by different rules.

This guide covers the HPA section by section, then compares PMI with FHA mortgage insurance premiums, the VA funding fee, and USDA guarantee fees. Every rule was checked on November 4, 2026 against the HPA at 12 U.S.C. 4901-4910, the Fannie Mae and Freddie Mac charter requirement, HUD Mortgagee Letter 2023-05, the VA funding fee page, and USDA's regulation and current fee notice. This is study information, not legal advice; government fees change.

The short version

PMI protects the lender, not the borrower. Conventional loans above 80% LTV that are sold to Fannie Mae or Freddie Mac need credit enhancement, which is usually mortgage insurance.
The HPA covers borrower-paid PMI on a single-family principal residence for loans closed on or after July 29, 1999.
80%: the borrower can ask to cancel when the balance is scheduled to reach, or actually reaches, 80% of original value.
78%: PMI ends automatically when the balance is scheduled to reach 78% of original value, if the borrower is current.
Midpoint: PMI cannot be required past the first day of the month after the midpoint of the amortization period, if the borrower is current.
Original value is the lower of the sales price or appraised value at closing (on a refinance, the appraisal the lender relied on).
Lender-paid MI cannot be canceled by the borrower. It ends only on refinance, payoff, or other termination of the loan.
FHA, VA, and USDA insurance and guarantees are not PMI, so the HPA does not apply to them.

What mortgage insurance does

Mortgage insurance pays the lender (or the investor that owns the loan) part of its loss if the borrower defaults. The borrower pays for it, directly or through a higher rate, but the lender is the insured party.

The 80% line comes from the charters of Fannie Mae and Freddie Mac. Under 12 U.S.C. 1717(b)(2), Fannie Mae can buy a conventional mortgage with an LTV above 80% only if it has one of three forms of credit enhancement:

Insurance or a guaranty on the portion of the unpaid balance above 80% of value
The seller keeping a participation of at least 10% in the mortgage
The seller agreeing to repurchase or replace the mortgage if it defaults

Freddie Mac's charter has the same requirement. In practice, option 1, private mortgage insurance, is how most low-down-payment conventional loans meet it. The HPA itself does not require anyone to carry PMI (12 U.S.C. 4910). It only controls how borrower-paid PMI ends and what borrowers must be told.

Ways to pay for PMI

Borrower-paid PMI can be a monthly premium (usually collected through escrow), a single premium paid at closing, or a split of the two. All of these are covered by the HPA cancellation rules. With lender-paid MI (LPMI), the lender pays the premium and usually charges a higher interest rate; LPMI has its own notice rules, covered below.

Which loans the HPA covers

The HPA applies to a "residential mortgage transaction," defined in 12 U.S.C. 4901 as a loan consummated on or after July 29, 1999 (one year after the law was signed) that is secured by a single-family dwelling that is the borrower's principal residence, to buy, build, or refinance it. Single-family means one dwelling unit.

That definition leaves a lot out. The cancellation and termination rules do not apply to:

Second homes and investment properties
Two- to four-unit properties
Loans closed before July 29, 1999 (those borrowers get only an annual notice that PMI may be cancelable and whom to contact)
FHA, VA, and USDA loans, because the law's definition of private mortgage insurance excludes insurance under the National Housing Act (FHA), title 38 (VA), and title V of the Housing Act of 1949 (USDA Rural Development)

Original value: the number every trigger uses

All three HPA triggers compare the loan balance to the property's original value, not today's market value. Under 12 U.S.C. 4901:

On a purchase, original value is the lesser of the sales price in the contract or the appraised value at the time the loan closed.
On a refinance, it is only the appraised value the lender relied on to approve the refinance.

Rising home prices do not move the HPA dates. A borrower whose home has gone up in value may still be able to drop PMI early, but that comes from the investor's or servicer's policy (often with a new appraisal), or from an agreement with the holder, which 12 U.S.C. 4910 expressly allows. It is not one of the HPA's three triggers.

Memory hook: 80 you ask, 78 it's automatic, midpoint it's over. All three are measured against original value.

Borrower-requested cancellation at 80%

The cancellation date is when the principal balance is first scheduled to reach 80% of original value under the initial amortization schedule, or, at the borrower's option, when the balance actually reaches 80% through actual payments, including extra principal. For an adjustable-rate mortgage, the schedule used is the amortization schedule then in effect.

Under 12 U.S.C. 4902(a), PMI must be canceled on the cancellation date, or later once the borrower meets every condition. The borrower must:

Submit a written request to the servicer
Have a good payment history
Be current on the loan
Satisfy any holder requirement for evidence that the property's value has not declined below original value (the type of evidence must be set in advance and disclosed promptly when the borrower asks), and certify that there is no subordinate lien on the borrower's equity

What "good payment history" means

The definition in 12 U.S.C. 4901 has two look-back windows, measured from the later of the cancellation date or the date the borrower asks to cancel:

No payment 60 or more days late in the 12-month period that begins 24 months before that date, and
No payment 30 or more days late in the 12 months right before that date

Automatic termination at 78%

The termination date is when the principal balance is first scheduled to reach 78% of original value, based solely on the initial amortization schedule for a fixed-rate loan (or the schedule then in effect for an ARM), regardless of the actual balance on that date. Under 12 U.S.C. 4902(b), PMI terminates:

On the termination date, if the borrower is current on that date, or
If the borrower is not current, on the first day of the first month beginning after the date the borrower becomes current

The borrower does not have to ask, and no good-payment-history test, appraisal, or lien certification applies. The borrower only has to be current. Extra principal payments do not speed up automatic termination, because it runs off the schedule. Those payments help with borrower-requested cancellation, which can use actual payments.

Final termination at the midpoint

If PMI has not ended under the 80% or 78% rules, 12 U.S.C. 4902(c) says it cannot be required beyond the first day of the month immediately following the midpoint of the amortization period, as long as the borrower is current. The midpoint is halfway through the amortization period, so year 15 on a 30-year loan. This backstop matters most for high-risk loans (below) and loans that amortize slowly.

Worked example

A borrower buys a principal residence for $300,000. It appraises at $310,000. The loan is a 30-year fixed-rate mortgage of $285,000 (95% LTV) with borrower-paid monthly PMI.

Original value: the lesser of $300,000 and $310,000 = $300,000
Borrower can request cancellation at a balance of 80% x $300,000 = $240,000, scheduled or actual
Automatic termination when the scheduled balance hits 78% x $300,000 = $234,000, if current
Final termination: the first day of the month after the loan's midpoint (15 years), if current

The higher appraisal does not help, and a later rise in value does not change these numbers. The SAFE exam math guide and underwriting guide have more LTV problems.

After PMI ends: payments, refunds, and notices

No more premiums after 30 days. Under 12 U.S.C. 4902(e), no PMI payments may be required more than 30 days after the termination date, or, for a borrower request, more than 30 days after the later of the request or the date the borrower meets the evidence and certification requirements.
Unearned premiums back within 45 days. The servicer must return all unearned premiums to the borrower within 45 days after cancellation or termination (4902(f)). A mortgage insurer holding unearned premiums must send them to the servicer within 30 days after the servicer notifies it.
Termination notice within 30 days. Under 12 U.S.C. 4904(a), within 30 days after PMI is canceled or terminated, the servicer must tell the borrower in writing that the PMI has ended and that no further premiums or fees are due.
Denial notice within 30 days. If the servicer decides the loan does not qualify, it must give written notice of the grounds, including the results of any appraisal it used, within 30 days (4904(b)).
Loan modifications. If the borrower and lender modify the loan, the cancellation, termination, and final termination dates are recalculated to reflect the new terms (4902(d)).

Required HPA disclosures

At closing

Under 12 U.S.C. 4903(a), when PMI is required on a covered loan, the lender must give the borrower these at consummation:

Fixed-rate loans: a written initial amortization schedule, plus written notice of the right to request cancellation and the date it can be requested based on the schedule, the right to request it earlier based on actual payments, the automatic termination date, and whether any exemption applies.
ARMs: written notice that the borrower may cancel on the cancellation date and that the servicer will notify the borrower when it is reached, that PMI will terminate automatically on the termination date, and whether an exemption applies. ARM schedules can change, so there is no fixed date to print.
High-risk loans: notice that PMI cannot be required past the midpoint of the amortization period if the borrower is current.

Every year

The servicer must send an annual written statement of the borrower's cancellation and termination rights, with an address and phone number the borrower can use to ask whether PMI can be canceled. It can be included with the annual escrow account statement required under RESPA, which the RESPA servicing rules guide covers.

No fees for any of it

Under 12 U.S.C. 4906, no fee or other cost may be charged for any notice or information the HPA requires.

Lender-paid mortgage insurance

With LPMI, the lender (or someone other than the borrower) pays the premium, and the cost usually shows up as a higher interest rate. Under 12 U.S.C. 4905, the HPA's cancellation, termination, and notice sections (4902 through 4904) do not apply to LPMI. Instead the borrower gets two notices:

By the loan commitment: written notice that LPMI cannot be canceled by the borrower (unlike borrower-paid PMI), that it usually means a higher rate, that it ends only when the loan is refinanced, paid off, or otherwise terminated, that both options have benefits and drawbacks (with a generic 10-year cost comparison), and that LPMI may be tax-deductible if the borrower itemizes.
Within 30 days after the date borrower-paid PMI would have terminated: a notice that the borrower may wish to review financing options that could eliminate the PMI requirement.

High-risk loan exception

Under 12 U.S.C. 4902(g), the 80% and 78% rules do not apply to loans that were high risk at closing:

For loans at or below the conforming loan limit, "high risk" is determined by Fannie Mae and Freddie Mac guidelines.
For other loans, the lender decides, but PMI must still terminate when the balance is first scheduled to reach 77% of original value.

Either way, the midpoint final termination still applies, and the borrower must be told at closing that PMI cannot last past the midpoint if they stay current.

Penalties, enforcement, and state law

Civil liability (4907). A servicer, mortgagee, or mortgage insurer that violates the HPA is liable for actual damages plus interest, statutory damages of up to $2,000 in an individual action, court costs, and reasonable attorney fees. Class action recovery is capped at the lesser of $500,000 or 1% of the liable party's net worth (or gross revenues for some parties).
Two-year deadline. A borrower must sue within 2 years after discovering the violation.
Agency enforcement (4909). The federal banking agencies, the NCUA, the Farm Credit Administration, and the CFPB enforce the HPA for the institutions they oversee. When a violation is found, they can require the institution to correct the borrower's account and refund unearned premiums.
State law (4908). The HPA generally preempts state PMI laws. Protected state laws that already existed on January 2, 1998 survive where they give borrowers more, such as earlier termination or more disclosure.

FHA, VA, and USDA: not PMI

Government loans have their own insurance or guarantee charges, set by the agency, and the HPA's cancellation dates do not apply to any of them. The loan programs guide covers the programs themselves. Here is how the charges compare.

FHA mortgage insurance premium (MIP)

FHA charges an upfront MIP of 1.75% of the base loan amount, which can be financed, and an annual MIP paid monthly. Under HUD Mortgagee Letter 2023-05 (for loans with case numbers endorsed on or after March 20, 2023), the annual MIP on the most common FHA loan, a term over 15 years with a base loan at or below the national conforming loan limit, is:

Base LTV	Annual MIP	How long it lasts
90% or less	0.50%	11 years
Above 90% to 95%	0.50%	Mortgage term
Above 95%	0.55%	Mortgage term

Shorter terms and larger loans have their own rates. The duration rule is the exam favorite: 11 years if the original LTV is 90% or less, otherwise the life of the loan. A borrower with 3.5% down who wants to drop MIP usually has to refinance, often into a conventional loan.

Example: a $300,000 FHA base loan has an upfront MIP of $300,000 x 1.75% = $5,250.

VA funding fee

VA loans have no monthly mortgage insurance. Instead, most borrowers pay a one-time funding fee that can be paid at closing or financed. Current rates from VA:

Loan type	First use	After first use
Purchase or construction, less than 5% down	2.15%	3.3%
Purchase, 5% to less than 10% down	1.5%	1.5%
Purchase, 10% or more down	1.25%	1.25%
Cash-out refinance	2.15%	3.3%
Interest Rate Reduction Refinance Loan (IRRRL)	0.5%	0.5%
Assumption	0.5%	0.5%

Borrowers do not pay the funding fee if they receive VA compensation for a service-connected disability (or are eligible for it but receive retirement or active-duty pay instead), are a surviving spouse receiving Dependency and Indemnity Compensation, have a proposed or memorandum rating showing they are eligible for compensation before closing, or are active-duty service members who received the Purple Heart.

USDA guarantee fees

USDA guaranteed loans have an upfront guarantee fee and an annual fee. The regulation at 7 CFR 3555.107 caps the upfront fee at 3.5% and the annual fee at 0.5%, and USDA sets the actual rates each fiscal year. For fiscal year 2027 (October 1, 2026 through September 30, 2027), USDA's notice sets the upfront fee at 1.00% and the annual fee at 0.35% for both purchase and refinance loans. The lender may pass the upfront fee to the borrower, and it can be financed. The annual fee applies for the life of the loan.

Common exam traps

Original value, not current value. Every HPA percentage uses the lower of price or appraisal at closing.
80 is a request; 78 is automatic. Cancellation at 80% needs a written request and conditions. Termination at 78% needs only a current borrower.
Actual payments count only for the 80% request. Automatic termination runs off the original schedule.
Midpoint means halfway through the amortization period, then the first day of the next month.
Principal residence, single-family. Second homes, investment properties, and 2-4 unit properties are outside the HPA.
LPMI cannot be canceled. Its notice comes by the loan commitment, not at closing.
FHA MIP is not PMI. 11 years at 90% LTV or less, otherwise the life of the loan.
VA has no monthly MI, and disabled veterans receiving compensation are exempt from the funding fee.
Deadlines: 30 days for no further premiums and for notices, 45 days to refund unearned premiums, 2 years to sue after discovery, $2,000 maximum individual statutory damages.

Five practice questions

1. A borrower bought a home for $250,000 that appraised at $260,000, with a $237,500 loan and borrower-paid PMI. At what scheduled balance does PMI terminate automatically under the HPA?
Answer: $195,000. Original value is the lower $250,000, and 78% x $250,000 = $195,000.

2. A borrower's balance reaches 80% of original value early because of extra principal payments. What else must happen before PMI is canceled?
Answer: The borrower must request cancellation in writing, have a good payment history, be current, and meet any holder requirement to show the value has not declined and that there is no subordinate lien.

3. A borrower with lender-paid mortgage insurance asks the servicer to cancel it when the loan reaches 78% of original value. What is the correct response?
Answer: LPMI cannot be canceled by the borrower and does not terminate automatically. It ends only if the loan is refinanced, paid off, or otherwise terminated.

4. An FHA borrower made a 10% down payment on a 30-year loan with a case number endorsed in 2026. How long will annual MIP last?
Answer: 11 years, because the original LTV was 90% or less.

5. PMI on a covered loan was canceled on March 1. By when must the servicer return the unearned premiums?
Answer: Within 45 days after cancellation, so by April 15.

For more Federal Laws practice, read the RESPA servicing guide and ATR/QM guide, then test yourself with the free SAFE practice test.

Sources

Homeowners Protection Act, 12 U.S.C. 4901-4910 (definitions, termination, disclosures, LPMI, fees, liability, state law, and enforcement)
12 U.S.C. 1717(b)(2), Fannie Mae credit enhancement requirement
HUD Mortgagee Letter 2023-05, Reduction of FHA Annual Mortgage Insurance Premium Rates
VA funding fee and loan closing costs
7 CFR 3555.107, USDA guarantee fees and USDA Rural Development, Fiscal Year 2027 Conditional Commitment Notice (September 16, 2026)
NMLS, SAFE MLO test content outline

Frequently asked questions

When can a borrower cancel PMI under the Homeowners Protection Act?

When the principal balance is scheduled to reach, or actually reaches, 80% of the original value of the home. The borrower must ask in writing, have a good payment history, be current, and meet any holder requirement to show the value has not declined and that there is no second lien.

When does PMI end automatically?

When the balance is first scheduled to reach 78% of original value under the initial amortization schedule, if the borrower is current. If not, it ends on the first day of the month after the borrower becomes current. In all cases it cannot be required past the first day of the month after the loan's midpoint if the borrower is current.

What is original value under the HPA?

For a purchase, the lower of the contract sales price or the appraised value at closing. For a refinance, the appraised value the lender relied on to approve the refinance.

Does the Homeowners Protection Act apply to FHA loans?

No. The HPA's definition of private mortgage insurance excludes FHA, VA, and USDA insurance and guarantees. FHA annual MIP lasts 11 years if the original LTV was 90% or less and the full mortgage term otherwise.

Can lender-paid mortgage insurance be canceled?

No. LPMI cannot be canceled by the borrower and does not terminate automatically. It ends only when the loan is refinanced, paid off, or otherwise terminated. The lender must explain this in writing by the time of the loan commitment.

How fast must unearned PMI premiums be refunded?

Within 45 days after PMI is canceled or terminated. The servicer also cannot require PMI payments more than 30 days after the cancellation or termination date, and must send written notice within 30 days that the PMI has ended.

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