Let’s back up and think about down payments. Lenders like to see you put 20% down, which might not seem like much — until you’re talking about an asking price of hundreds of thousands of dollars. After all, the median home price in the U.S. was $285,700 in June 2019. Paying 20% of that means you’d need $57,140 just to close on your new home loan!
But what if you don’t have that kind of money to put down? Don’t worry, you’re not out of luck. You can still get a mortgage. But if you don’t have the full 20% down payment, your lender will probably want a little extra insurance that you’ll pay your loan as agreed. If so, for a conventional loan, they’ll require you to add the cost of PMI to your monthly home loan (it’s called just MI, or mortgage insurance, if you have a government-backed loan such as an FHA loan).
It might seem daunting — after all, if you don’t have the money to put 20% down, why do you have to cough up extra? But here’s a secret: Not all first-time buyers have to pay PMI or MI. We’ve combed through the most recent data on home affordability to show you 11 great ways to buy your new home without paying your lender’s insurance premiums.
What’s PMI or MI, and why would I need to pay it?
As you’re figuring out how much you can afford and what kind of loan will be best for your situation, you’ll need to know when mortgage insurance applies. PMI is private mortgage insurance on a conventional home loan. Lenders require it to protect their investment in situations when buyers have less than a 20% stake in the home.
If you’re taking out a government loan — an FHA loan, for example — the same concept applies, but the lender’s insurance is just called mortgage insurance (and it’s not private).
In either situation, the mortgage insurance is an extra cost in addition to your monthly mortgage payment, and it usually costs between 0.5% and 1% of the value of your home each year. For our example home that costs $285,700, MI payments of 1% could be $2,857 a year, or $238 each month — on top of the cost of your mortgage and taxes.
Your agent can help you find a good lender
Because the mortgage insurance requirement will vary depending on the price of the house you choose, the lender, and even your particular loan, it pays to get some help as you’re figuring it all out. As real estate agent Josh Vernon explains, a good agent can help direct you to reputable lenders, which is crucial when you’re buying your first home. Vernon is a top-selling agent in Trussville, Alabama, and he makes a point of connecting his clients with vetted lenders who can help them.
“A lot of times, for the first-time homebuyer, they don’t even really know what their finances look like,” he says. So he makes sure to always follow up with a phone call to make sure his clients are comfortable with the lender they’ve selected. If you’ve chosen a good agent, you can be confident that they’ll work with you and the lender to make certain you find the best loan for your situation.
As you explore your lending options, you could opt to pay a smaller down payment and just deal with paying MI as the price of doing business.
But if you’d like to avoid that extra monthly cost, here are some proven strategies to make it possible.
Put down 20% (or more)
This may be the simplest way to avoid paying mortgage insurance, though of course it’s not necessarily the easiest. But if you have a significant stake in the home of 20% or more, the bank no longer requires insurance on your loan.
Coming up with a down payment of 20% for a home might be easier to do in areas of the country with a lower cost of living, although salaries can be lower there, too. A strict savings plan and a little bit of discipline will help get you there faster. Plus, knowing how much you can afford will help. HomeLight’s affordability calculator shows you what you could be shopping for.
Family members can also help you reach the 20% threshold by giving gifts, although your lender will require some documentation about this. If you go with an FHA loan (which has lower down payment requirements to begin with), the money must be a “bona fide” gift, with no expectation of repayment, and it should come from someone who might really be expected to give a gift like that: actual friends, family members, even charitable organizations.
There will be rules governing how you use a gift for a down payment, so be sure to work with your lender so that you proceed properly with the loan.
Get help via a down payment assistance program
Saving up enough money for a down payment is definitely one of the toughest obstacles for first-time homebuyers. That’s why there are a number of programs designed by state housing agencies to help you clear that hurdle so you can begin your journey of homeownership.
These are typically called down payment assistance (DPA) programs, and a study from the Urban Institute shows there are 2,144 active programs across the country — 264 in California alone. The Urban Institute estimates that between 30% and 52% of buyers qualify for programs like these, and when doing so, they’re eligible for amounts up to $30,000. DPA programs are available for conventional as well as government loans; you’ll find the most assistance available with FHA, VA, and USDA loans. Ignoring these programs means you could be leaving a lot of money on the table.
Just take Nevada as an example. The state’s Home is Possible program will match up to 5% of the purchase price in the form of a grant, which you don’t have to pay back. Even more impressive: Consider Arizona, where the DPA is 10% of the purchase price (up to $20,000) — meaning if you came up with the other 10% for a down payment, you wouldn’t have to pay PMI. Buy a house in Tucson, where the median price is $177,900, and you could get a discount of $17,790. Provided you come up with the other $17,790 yourself, you’ll pay no MI, and you’ve just shaved a good portion off what you owe on your new home, too.
Not bad for free money!
Consider a ‘piggyback’ loan
Another way to skirt the PMI requirement is to try for an 80-10-10 loan, also called a “piggyback loan.” This method would have you take out two loans concurrently — one for 80% of the home’s purchase price, and a second mortgage for 10% of the purchase price. The final 10% you put down yourself.
You’ll still be financing 90% of the purchase price this way, but since the main mortgage is for only 80% of the home’s value, you won’t have to pay mortgage insurance.
Take advantage of your veteran status
You’ve served your country — now the government wants to offer you assistance in return. If you’re a qualified veteran (meaning you meet requirements for service history and duty status) then you’re eligible to take advantage of a VA Home Loan, which has favorable terms: 0% down and no mortgage insurance. These loans are backed by the Department of Veterans Affairs and provided by a private loan company.
See if you’re eligible for a USDA loan
These loans are offered by the U.S. Department of Agriculture. They’re intended for rural buyers, but the definition of rural can be quite broad. The main requirement is that you meet the USDA’s income guidelines; then, you can check whether your intended home fits the USDA geographic designation.
As the USDA loan is a government loan, your income must not exceed 115% of the median household income and you must be a U.S. citizen (or qualified resident foreign national). If you qualify, expect to enjoy a loan with 0% down and no mortgage insurance; you can even finance repair costs if you’ve found yourself a fixer-upper.
Ask your lender if they offer a slightly higher interest rate in exchange for lender-paid MI
Another way to avoid PMI: Try the timeless tactic of negotiation. See if your lender will accept different terms in the form of a higher interest rate, which will convert your insurance requirement from borrower-paid MI to LPMI, or “lender-paid mortgage insurance.”
Yes, LPMI will likely increase your rate, but this tactic isn’t as offbeat as it sounds.
In fact, Vernon says some lenders in his market offer a flat-rate loan, which includes an eighth or a quarter of a percentage point rate bump in exchange for LPMI. You’ll need to do the math on your particular loan; it’s possible to actually see a savings in monthly costs because the tiny interest-rate bump is smaller than your MI payment would have been.
To see some examples of how MI (lender- or borrower-paid), down payment, and loan-to-value rates interact, check out the tables produced by the Urban Institute (under the Monthly Payment Comparison section).
If you’re a teacher, check out this program
Are you a school teacher, firefighter, police officer, or emergency medical technician (EMT)? You could get a discount of 50% off your house through the HUD Good Neighbor Next Door program.
Here’s how it works: You’ll take out two loans, each for half of the purchase price. The first loan is a traditional one, with interest and regular payments, and the second one is a “silent” second mortgage.
As long as you comply with the regulations, buy a home in one of the program’s designation revitalization areas, and fulfil your promise to live in the home for three years, you don’t owe any payments or interest on that silent loan. No MI, either, since the first loan was for 50% of the price of the home. And after the three years are over, that second loan gets completely dismissed.
You could qualify for Bank of America’s low-down-payment program
The government isn’t the only entity offering loans with tiny down payments. Check out Bank of America’s Community Homeownership Commitment, which offers affordable housing programs for first-time homebuyers.
Requirements vary by location, but generally, you can expect to be asked to complete homebuyer education through an approved counseling agency. Then you’ll be eligible for an Affordable Loan Solution mortgage, with as little as 3% down on loan amounts up to $510,400 ($765,600 in high-cost areas) and no mortgage insurance.
Scoop up special loans for doctors, lawyers, and other professionals
If you’ve chosen a profession that requires a lot of advanced training or specialized degrees, you know what burden home loans can be when you have student loans, too. Flagstar Bank offers unique home loan programs especially for recent grads and medical residents. These loans offer mortgages up to $1.5 million with a low or no down payment and no mortgage insurance required.
Get help with high-cost housing
If you’re feeling overwhelmed or trapped living in an expensive housing market, there are loans designed specifically to help you. The HomeRun Mortgage from Citi can grant you a down payment as low as 3% and no MI if you meet their qualifications — even if your loan is jumbo-sized. The program covers loans up to $510,000 (up to $765,600 in certain high-cost areas).
Let this start-up help you finance your home
If you’ve never heard of Sofi, it’s a lending start-up that’s aiming to help you make your dream home a reality. Sofi mortgages are available for as little as 10% down, with no PMI on jumbo loans, regardless of your loan-to-value ratio. There are no hidden fees, either, so you’ll know exactly what you’re paying when it comes time to close.
Bonus solution: Pay MI – but drop it when you’re eligible
One last way to handle the MI problem: roll up your sleeves and pay, but only for a short while. Once you reach 20% equity in your home — a good reason to monitor your home’s value regularly — you can request PMI be removed. In fact, there’s a federal law that protects your right to do so (it’s called the Homeowners Protection Act).
What you’ll need to do is make a request to your lender in writing and ask for MI to be removed. Make sure your loan is in good standing and that there are no other liens on your property first. Even if you neglected to ask your lender to drop it, MI will still be taken off automatically when you reach 78% loan-to-value (LTV) on your home for most loan products.
Some government programs, which allow for very low down payments, may require MI for the lifetime of the loan, but you can often remove this additional payment by refinancing that loan when you reach an LTV of 80% or less.
The bottom line
So now you have the lowdown on mortgage insurance and ways around it. Is it worth it to pay? That’s up to you. Just make sure you haven’t left any money on the table in the form of grants, aid, or other homeowner assistance before you cough up extra payments.
This is where a good real estate agent can come in handy — the best-connected agents will know the sorts of lenders that will get you a fair mortgage and any assistance you’re qualified for.
“As your real estate agent, we’re going to protect you and make sure that this process is stress-free and streamlined,” says Vernon’s business partner, Jamey Reynolds. “We never promise perfection, but we promise we’re gonna work through this process so that we help you hit your goal.”
The end result? Your dream home — and maybe even your dream loan.
Header Image Source: Shutterstock.com/Gts