You probably assume that if you don’t put 20% down on a home, you are going to pay PMI or Private Mortgage Insurance. While it’s true that if you take out a conventional loan, you will pay PMI with a loan-to-value ratio higher than 80%, there are ways around it.
If you find yourself without a 20% down payment but don’t want to pay PMI, try one of the following tips.
Are you a Veteran?
If you are a veteran of the military, Reserves, or National Guard, you may be eligible for a VA loan. The best thing about this loan program is that it provides 100% financing and doesn’t charge PMI. You don’t even pay a mortgage insurance premium upfront (at the closing), like you do for other government-backed loans.
Veterans must have served at least 90 days during wartime, 181 days during peacetime, or 6 years in the National Guard/Reserves. If you meet these requirements and had an honorable discharge, you may be eligible for this flexible 100% loan program.
The only ‘extra’ fee the VA loans have is the funding fee. This fee is how the VA is about to guarantee loans for veterans. In other words, it’s how lenders are willing to provide veterans with average credit scores and higher than average debt ratios 100% financing. The VA agrees to pay a VA lender back 25% of the amount a borrower defaults on, if they do in fact default.
The upfront funding fee is 2.15% of the loan amount for regular military personnel and 2.4% for those that served in the National Guard or Reserves.
Can You Get a Piggy Back Loan?
A piggyback loan is actually two loans. You apply for the first mortgage for 80% of the purchase price of the home. You then also apply for a home equity loan/line of credit for 10% of the home’s purchase price. The remaining 10% will need to come from you in the form of a down payment.
The piggyback loan is also known as an 80/10/10. You don’t pay PMI on this loan because your first mortgage isn’t worth more than 80% of the home’s purchase price. The mortgage lender that provides the funding for this loan has first lien position. This means if you default on your loan, that lender gets paid any proceeds from the sale of the home first. Because of the first lien position and 80% equity position, the lender won’t make you pay for PMI>
Other Ways Around the PMI Requirement
If neither of these options is available to you, there is one more way you can get away from PMI. You can ask the lender for lender paid PMI. While there is still insurance being paid, it’s not coming out of your pocket. It’s also not added to your monthly mortgage payment.
When the lender pays the PMI, they pay the full amount upfront. This means you are paid-in-full for the PMI for the loans’ term. If you sell the home earlier than when would owe less than 80% of the home’s value, you lose out on the deal. If, however, you stay in the home for the duration of the loan or at least a little longer than when you owe less than 80% of the home’s value, you come out ahead.
In exchange for the lender-paid PMI, lenders will charge you a slightly higher interest rate. This is how they make their money back. You pay more interest on the loan, which reimburses the lender for the PMI. This only works in your favor if this is your ‘forever home’ or at least the home that you plan to stay in for the foreseeable future.
PMI Isn’t all That Bad
You should know that if you do have to pay PMI, it’s not the end of the world. First, it is cancellable. You won’t pay it forever. As soon as you owe less than 80% of the home’s value, you can request cancellation of the PMI. This can occur naturally, by making your payments on time and following the amortization schedule. It can also occur quicker if you pay extra towards your loan’s principal and/or if the home appreciates over time.
You can think of the PMI as a way to help you get the loan you need. If PMI weren’t available, lenders would be unlikely to write loans that are for more than 80% of the home’s value. This would make it much more difficult for many borrowers to secure a loan.
No two borrowers will pay the same amount in Private Mortgage Insurance. It depends on the qualifications you bring to the table. In particular, your down payment and credit score play the largest roles. The higher your credit score is and the higher your down payment is, the less PMI lenders will charge you because you pose a lower risk than someone that puts less money down on the home and has a lower credit score.