Removing PMI

[preppy]

When purchasing our new home a year ago we put down 5% in order to use the extra cash for home improvements. We built a garage which included an addition of a large home office, as well as added a stone patio and outdoor shower. With these improvements as well as how bananas the market I believe that we have the LTV ratio needed to remove PMI. I requested information from our lender and it states that if the loan is less than 2 years old, which it is, that you have to show "substantial improvements have been made to the property". If we can show substantial improvements they will order an appraisal, which we will pay for, and then if it appraises out the PMI will be dropped. 

Does anyone know what the threshold is for "substantial improvements"? It was not very clear and they didn't provide more information when I asked for clarification. I really think it would appraise out and would love the cost savings of dropping PMI but don't want to spend a lot of time and effort if it's unlikely. 

If anyone has similar experience and success or non-success in this let me know!

[Susie]

We bought in May 2021 with 5% down, and went through the process of dropping PMI in the fall.  It's going to vary a lot by lender, but ours offered a couple different paths to dropping PMI.  

We did it by making a large principal payment, using the proceeds from the sale of our old house.  Since we overlapped for a month, we didn't have the liquidity to put the whole 20% down at closing, but we had it not too long after.  We had to pay the loan down to 80% LTV, and pay for them to do an appraisal just to confirm that the house hadn't lost value.  We also elected to re-amortize the loan at the same time.

If for some reason that path didn't work, I considered the "substantial improvement" path.  We ripped out the 1990s carpet and did finished in place cherry HW floors on both levels before we moved in, and that seems "substantial" to me!  We also put in a Generac whole house generator.  If THAT didn't do it, we're having new windows put in throughout in Sept of this year, and surely that would get us there in aggregate.  Since we didn't have to go this route though, I don't know where the line is on "substantial."  I would think your garage/office addition would be "substantial" as it probably adds square footage.  I would think the patio/shower would not be "substantial."  That's just my gut.

Our lender didn't consider any gains in the market within the first 2 years after closing at all.  Our house didn't appraise for the full contract price last spring; when we put 5% down, the "V" that we were 5% relative to, was the appraised value, which was less than the contract price.  Unfortunately that meant we had to put >5% down relative to contract price.  When it came time to drop PMI, the "V" that we had to be 80% LTV relative to, was still the original appraised value.  Even though the new appraisal came back at exactly our purchase price!  So that was frustrating.  IDK exactly how that works with the "substantial improvement" route, but I think they figure out added value from the improvement, and add it to your original appraised value.  At least, that's what I think our lender would've done.  They would not just do a fresh 2022 appraisal using 2022 market values.  YMMV on that.

I was nervous that we would pay for the appraisal, put the effort into the process, and they would say oh, your house dropped $10 in value, too bad, you can't drop PMI.  Or something like that.  But it actually went really smoothly.  

[noodleoo]

No help with your actual question, but I'm considering doing a garage addition on our house and I'd love to pick your brain on your process! I'll send you a PM.

We dropped PMI a few years after buying our house, but we did it by refinancing. I think we had to do that because we had an FHA loan.

[jwright]

I don't think there is a black and white answer, but it would be anything that increases the property value and therefore brings your LTV into an acceptable range.

Found this online: www.roundpointmortgage.com/-/media/roundpoint-marketing-site/forms/roundpoint-pmi-removal.ashx

What is considered a substantial improvement?
A substantial improvement increases value, improves marketability, and/or extends the useful life of the property. Substantial
improvements include renovations, finishing a basement; addition of square footage; and/or additional feature(s), garage, deck, pool,
sprinklers. Improvements or repairs made to maintain functionality or improve cosmetics are not considered substantial. Some
improvements are considered substantial by Freddie Mac but not Fannie Mae.

[preppy]

The wording on the forms make me think they consider both improvements and current market value but I will reconfirm it’s both, I think with both we would easily be over amount needed. Thanks!

[ellipses84]

I would consider the type of renovation you did to be a substantial improvement. It should definitely appraise higher than an identical property without those improvements. It increased your square footage.

[treschic]

If you’re paying for the appraisal, I’m not sure what it matters. I think ours would drop off at 78% automatically and if we wanted it any earlier we had to order an appraisal.