2

(In the USA)

Looking around the Internet, I see many places saying that private mortgage insurance (PMI) is almost certainly going to be required for any mortgage with a less than 20% down payment.

I am asking, is it possible to avoid getting PMI if you have less than 20% down? And if so, what are the alternatives and/or lenders that provide such a mortgage?

(Note that my question is different from this one, in that I'm asking about avoid PMI before closing on a house, rather than getting out of PMI before reaching 20% in equity after already getting into a mortgage.)

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  • 1
    This is a jurisdiction-based question. Where do you live? – Grade 'Eh' Bacon Dec 12 '17 at 18:29
  • @Grade'Eh'Bacon, I am in NJ presently, but don't plan on living here when I buy a home and so would appreciate as general an answer as possible. – NeutronStar Dec 12 '17 at 19:47
  • Laws are not 'general'. They are jurisdiction-specific. However I am not aware of any state-specific PMI laws, so knowing you're in the US should be enough to provide an answer. – Grade 'Eh' Bacon Dec 12 '17 at 19:51
  • @Grade'Eh'Bacon, some laws are universal (at least across the whole country). – NeutronStar Dec 12 '17 at 21:22
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    IFor reference, PMI is PRIVATE Mortgage Insurance, not personal. AFAIK it's not a matter of law, but of the lender's policy, backed up by institutions like the FHA. Apparently there are ways to avoid it, e.g. quickenloans.com/blog/avoiding-pmi – jamesqf Dec 13 '17 at 4:14
7

Yes. Outside of a VA loan, there are two common ways to do this:

  1. You take out a first mortgage for 80%, and a second mortgage for whatever is left after your down payment. Prior to 2008, it was common for the second mortgage to be 20% with literally no money down. After the housing bubble burst (which was possibly caused in part due to the existence of the no money down option), the second mortgage has fallen out of favor, but still exists in conjunction with some amount of down payment, perhaps in the 10% range.
  2. There is an option called LPMI (lender paid mortgage insurance). Basically the lender pays the PMI on your behalf in a lump sum, and charges you a higher interest rate as a result. This sometimes makes sense because the cost of the higher interest rate per month is typically less than the cost of PMI per month. The caveat though is that with PMI, once you get your equity over the 20% mark you can lose the PMI, but with LPMI the rate sticks with you for the life of the loan.

Some notes about LPMI:

  • In one scenario where I ran the numbers for PMI vs LPMI, we discovered that the buyer would have to keep his loan for 8 years in order for PMI to be the better option than LPMI. He ended up going with LPMI with the assumption that he would likely sell or refi within 8 years.
  • In another scenario the mortgage broker was able to drastically reduce the cost of LPMI. (I think the rate increase was only .125%) That made it a no-brainer compared to PMI.
  • In general, PMI is usually the better deal if you intend to keep your loan for a long time, especially because as soon as you accumulate the money, you can pay down the loan ASAP to lose the PMI. Note it probably will cost you $500 to order a new appraisal as required by most banks if removing PMI before the normal scheduled fall-off.
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  • WRT your 3rd bullet point, it's also possible for the house to appreciate considerably in a hot market, putting your LTV below the 80% threshold. – jamesqf Dec 13 '17 at 18:15
  • @jamesqf conversely it's also possible for the house to depreciate in a slow market and make that LTV ratio harder to hit. If the house depreciates is the removal of PMI based on current appraisal or appraisal at the time of sale? – Freiheit Dec 13 '17 at 21:36
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    @Freiheit - It could be contract specific, but typically, if you pay according to the amortization schedule and hit 78% LTV based on the original appraisal (time of sale), PMI is automatically removed regardless if the value of the home has decreased. But you can request to have PMI removed sooner once you have met 80% LTV based on a current appraisal. – TTT Dec 13 '17 at 22:49
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Yes, if:

  1. you're a Veteran and get a VA loan, or
  2. you've got family with money who'll make a private mortgage.

Otherwise, I don't think so.

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-1

Yes, that's possible. Owing to various customer-friendly loan options by different agencies, people can now buy a home with less than 20 percent down payment. Through a Conventional Loan or an FHA Loan, you can buy a home with only 3-5 percent of down percent. Moreover, the USDA Loan or VA Loan allows you to get a mortgage at 0 percent down payment.

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  • Note that the question is asking how to avoid PMI, not if you can purchase with less than 20% down, which is obvious in the question already. – TTT Dec 18 '17 at 16:04

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