5 Conventional Loans No PMI

Jan 11, 2023 | Mortgage Guides

Buying a new home does not begin and end at the purchase price. Like most investments, insurance is an expense that is often recommended and sometimes necessary. Regarding real estate, there are a couple of insurances to keep in mind. 

Homeowners insurance is the obvious one, as it protects the property and the borrower in the event of foreclosure. On the other hand, private mortgage insurance (PMI) is more overlooked despite being burdensome for homeowners. This additional expense comes in the form of another mortgage payment that some homebuyers are determined to avoid. 

This guide discovers how to attain a conventional home loan without adding PMI premiums. 

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What Is Private Mortgage Insurance?

Conventional mortgage lenders often mandate private mortgage insurance when homebuyers have a high loan-to-value ratio or make a minimal down payment.

In the event that a homeowner defaults, a PMI policy acts as a safeguard that reimburses the lender a portion of the unpaid loan balance. Unlike homeowners insurance, PMI does not protect the borrower from foreclosure. That doesn’t mean this insurance has no benefits, as it enables would-be homebuyers to afford properties they otherwise would not be eligible to finance. If a lender claims you need to pay PMI, it will find a provider and let you know the details of the insurance plan before the mortgage closes.

When Is PMI Required?

The standard down payment on a conventional mortgage is at least 20 percent of the home’s purchase price. If the prospective homebuyer cannot satisfy that, conventional lenders will require PMI. To determine the percentage of a down payment on a home loan, divide the upfront payment amount by the property’s listing price. There are exceptions to avoiding the PMI requirement, and it may be worth weighing such alternatives.

How Much Does PMI Cost?

The price of PMI, like other types of insurance, is based on insurance rates. Recent reports from the Urban Institute assess the average PMI costs ranging between 0.58 and 1.86 percent of the mortgage loan amount. Two key facets in determining a homebuyer’s PMI rate are their credit score and the total amount borrowed. The lower the credit score or higher the loan amount, the riskier the transaction is for lenders. For every $100,000 borrowed, Freddie Mac estimates the PMI cost to vary between $30 and $70, depending on the rate. 

How to Avoid PMI

Homebuyers who are looking to avoid the burden of mortgage insurance while still making less than a 20 percent down payment have a few options:

  1. Piggyback Mortgage Loan
  2. Lender-Paid Mortgage Insurance
  3. Home Loan Programs for Certain Buyers
  4. Family and Friends
  5. Government-Backed Loans

1. Take Out a Piggyback Mortgage

One way to avoid paying PMI while putting down less than required for your mortgage is to take out a piggyback loan. Suppose a homebuyer can produce a five percent down payment on their conventional mortgage. In that case, they can then take out a second mortgage, known as a piggyback loan, to provide the additional 15 percent down. That will combine for a total of 20 percent down, meaning PMI is not necessary.

Often, the same lender that provides the initial mortgage also provides the second. If not, local banks and credit unions are sources for this lesser-known type of mortgage loan. The downside is that the homebuyer is responsible for two mortgages. Nonetheless, piggyback loans can be an excellent option to bypass mortgage insurance on a conventional loan.

2. Find a Lender Offering Lender-Paid Mortgage Insurance

Another option to sidestep the responsibility of mortgage insurance is to have the lender cover the cost. Lender-paid mortgage insurance (LPMI) is what its title entails: the mortgage lender covers the insurance expense. Not all lenders offer such “no-PMI loans,” and finding one that does may require adequate research.

There is a catch with LPMI, which is the lender imposing higher interest rates. While premiums get reduced, the interest payments increase and are sometimes equal to paying for PMI yourself. Also, LPMI does not cancel out when you reach a particular home equity milestone as traditional PMI would at 80 percent. LPMI remains for the life of the loan.

3. New Home Loan Programs

Several loan programs can target certain homebuyers, such as those with insufficient means to make a 20 percent down payment. In particular, local banks and credit unions offer low down payment conventional loans at as little as three percent. These programs can be backed by Freddie Mac or Fannie Mae, along with nonprofit organizations allowing borrowers to waive the mortgage insurance premium requirement. 

While they often have strict credit scores and income minimums, programs like this open the door for borrowers to pay $100 a month in mortgage insurance payments. 

4. Borrow From Alternative Sources

A less traditional method to avoid mortgage insurance is borrowing the necessary funds from other sources. Close relatives or acquaintances may be able to help and, by doing so, relinquish them from being encumbered with PMI. 

This money will likely have to be repaid. Yet, because you have built up trust with the lender, you’ll be able to negotiate better terms than a private lender proposes.

5. Consider Government-Backed Loans

Perhaps the best option to avoid mortgage insurance while making a down payment of less than 20 percent is to skip out on conventional loans in exchange for federally-endorsed loans. Mortgages provided by the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) require minimal down payments with no insurance payments. Alas, such loans have limitations, and comparing their terms with conventional options is essential.

VA loans are confined to veterans and active-duty military members, while USDA mortgages are not eligible for properties within urban areas. Both require upfront fees, but considering these are one-time expenses, it can still be more frugal than paying PMI every month. Mortgages provided by the Federal Housing Administration (FHA) are another government-backed option. However, it does have an insurance charge that often equals the PMI.

Bottom Line

Private mortgage insurance might help some to get a foot in the door of homeownership, but it’s also an added expense. As outlined above, a number of ways can circumvent mortgage insurance on a conventional loan that does not require that 20 percent down payment milestone. When taking out a new mortgage, compare the options to determine whether paying for PMI each month is worth it. 

Consider Nashville’s hometown lender, Wesley Mortgage, for your no-PMI loan options.

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