PMI will automatically be eliminated from a conventional loan under which circumstance?

The correct circumstance for the automatic elimination of Private Mortgage Insurance (PMI) from a conventional loan is when the loan amount is reduced to 78% Loan-to-Value (LTV). This is based on guidelines established by the Homeowners Protection Act, which requires lenders to automatically terminate PMI when the borrower's equity in the home reaches 22% of the original property value (which translates to a loan balance of 78% of the property's value).

This provision is in place to protect homeowners from having to pay unnecessary insurance once they have built sufficient equity in their property, thereby reducing the lender's risk. Once the loan-to-value ratio reaches this threshold, lenders are mandated to eliminate PMI, easing the financial burden on borrowers who have demonstrated sufficient equity in their homes.

In contrast, other situations such as the duration of payment or borrower disability do not automatically dictate PMI removal. PMI is not impacted directly by these personal or conditional factors; it is strictly tied to the LTV ratio. Additionally, simply selling the loan to Fannie Mae does not trigger an automatic PMI cancellation, as the terms of the mortgage regarding PMI are maintained regardless of which investor holds the loan.