By law, when must lenders cancel PMI based on the loan-to-value ratio?

The correct answer is based on the guidelines set forth by the Homeowners Protection Act (HPA) of 1998, which applies to conventional loans that require private mortgage insurance (PMI). By law, lenders are required to automatically cancel PMI when the loan-to-value (LTV) ratio reaches 78% of the original property value or the value at which the mortgage was taken out, provided the borrower is current on their mortgage payments. This means that if a homeowner has paid down their mortgage enough so that they owe only 78% or less of the home's initial value, PMI should be cancelled without any action required from the borrower.

The rationale behind this regulation is to ensure that homeowners are not burdened with unnecessary costs once they have built sufficient equity in their property. The 78% threshold reflects a significant equity position that indicates reduced risk for the lender.

While an LTV of 80% is commonly mentioned in relation to PMI, it is the 78% figure established by the HPA that serves as the legal standard for cancellation. Different percentages like 75% and 72% are not legally recognized benchmarks for the cancellation of PMI, which is why they do not apply in this context.