Alyssa Lane
As a first-time buyer, you can avoid paying private mortgage insurance (PMI) in several ways. One way is to make a 20% down payment on a conventional home loan. Other options include piggyback loans, where you take out a second mortgage simultaneously with your first, and lender-paid mortgage insurance (LMPI), where the cost of PMI is included in the mortgage interest rate. Government-backed loans, such as Federal Housing Administration (FHA) loans or Veterans Affairs (VA) loans, may also be an option for those who are eligible, as they often have lower down payment requirements and may not require PMI. Additionally, state housing finance agencies offer mortgage and down payment assistance programs with reduced-cost mortgage insurance or no PMI at all.
| Characteristics | Values |
|---|---|
| Down payment | 20% down payment to avoid PMI |
| FHA loans | Mortgage Insurance Premium (MIP) instead of PMI |
| VA loans | For current and veteran service members and eligible spouses |
| USDA loans | For low-to-moderate income buyers in designated rural and suburban areas |
| Piggyback loans | Second mortgage to cover down payment requirements |
| Lender-paid PMI | Cost of PMI included in mortgage interest rate |
| State and local government programs | Designed for first-time home buyers with no PMI option |
| Credit score | Higher credit score may be required to avoid PMI |
| Pre-qualification | Get pre-qualified for a loan to save money and speed up the process |
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What You'll Learn
Make a 20% down payment
Making a 20% down payment is a traditional method to avoid paying private mortgage insurance (PMI). PMI is an insurance policy that protects lenders from the risk of default and foreclosure. Generally, if you need financing to buy a home and make a down payment of less than 20% of the home's cost, your lender will require you to buy insurance from a PMI company. Although it costs extra, PMI allows buyers who cannot make a significant down payment (or those who choose not to) to obtain financing at affordable rates.
According to the National Association of Realtors® (NAR) 2022 Profile of Home Buyers and Sellers, the typical down payment for first-time buyers is a mere 6.1%. This may be welcome news in a market where home prices have soared, which can make that 20% figure seem like an insurmountable barrier to homeownership. However, a bigger down payment results in a reduced monthly payment because you're borrowing less overall. That might be more important than ever in today's economy, where higher interest rates have ballooned monthly payments, and the inflationary environment has squeezed budgets.
There are other ways to avoid paying PMI, such as government-backed loans, including Federal Housing Administration (FHA) loans or Veterans Affairs (VA) loans, which often have lower down payment requirements and may not require PMI. However, these loans have their own eligibility criteria and may have other fees. Another option is lender-paid mortgage insurance (LMPI), where the cost of the PMI is included in the mortgage interest rate for the life of the loan. While this option can help you avoid PMI, it often increases the interest rate on your mortgage, and you may end up paying more in interest over the life of the loan.
Additionally, some lenders offer special programs for first-time homebuyers, such as Caliber Home Loans' "Elite Access" program, which offers jumbo loans with just 5% down and no mortgage insurance. These programs usually require a higher credit score to qualify, and it's important to note that lenders can change proprietary mortgage programs at any time.
In conclusion, while making a 20% down payment is a traditional and effective way to avoid PMI, there are also other options to consider. It's always a good idea to consult with a mortgage advisor and explore alternative down payment programs to make an informed decision that aligns with your financial situation and homeownership goals.
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Take out a piggyback loan
Taking out a piggyback loan is a way to avoid paying private mortgage insurance (PMI). This is a type of loan that involves getting two mortgages at once: one that covers a percentage of the home's value, and another that covers a smaller percentage. The most common type of piggyback loan is an 80/10/10 loan, where the first mortgage covers 80% of the property's value, the second covers 10%, and the remaining 10% is covered by the buyer's down payment. This lowers the loan-to-value (LTV) of the first mortgage to under 80%, eliminating the need for PMI.
Piggyback loans can be beneficial for those who cannot afford a 20% down payment on a conventional loan. With a piggyback loan, borrowers can put down as little as 10% but still get credit for a 20% down payment. This can be especially useful for first-time home buyers who may not have a large down payment saved up.
It's important to note that piggyback loans come with their own risks and costs. The second mortgage often has a variable interest rate, which can increase the overall cost of the loan. Additionally, borrowers will need to qualify for both loans based on their credit score, debt-to-income ratio, and income. It's also important to research and compare different lenders for both the primary and secondary mortgages to ensure you are getting the best rates and terms.
While piggyback loans can be a useful tool to avoid PMI, it's important to carefully consider the financial implications and risks involved. It may be beneficial to consult with a loan officer or financial advisor to determine if a piggyback loan is the best option for your financial situation.
In addition to piggyback loans, there are other ways for first-time home buyers to avoid PMI. These include government-backed loans such as Federal Housing Administration (FHA) loans or Veterans Affairs (VA) loans, which often have lower down payment requirements and may not require PMI. State housing finance agencies also offer mortgage and down payment assistance programs that can help first-time home buyers.
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Explore government mortgage programs
If you're a first-time buyer looking to avoid mortgage insurance, exploring government mortgage programs is a great option. These programs are designed to help people get on the property ladder, and some offer grants or loans that don't require mortgage insurance. Here's what you need to know:
Federal Housing Administration (FHA) Loans
FHA loans are government-backed and offer assistance to first-time homebuyers. They have a lower credit score requirement than most home loans and lower down payment requirements. FHA loans don't have PMI; instead, they come with Mortgage Insurance Premium (MIP), which is required regardless of the down payment size. However, you can eliminate MIP costs by refinancing into a conventional loan when you've built enough equity. FHA loans are a good option if you're looking to avoid PMI and keep your monthly payments low.
Veterans Affairs (VA) Loans
If you're a current or former service member or an eligible spouse, VA loans are an excellent option. These loans are backed by the Department of Veterans Affairs and don't require a down payment or mortgage insurance. There is a one-time funding fee, but VA loans can help you purchase a home, refinance your mortgage, or finance home repairs. VA loans often provide better deals than conventional mortgages, so be sure to compare the two before deciding.
U.S. Department of Agriculture (USDA) Loans
USDA loans are ideal for lower- and moderate-income buyers in designated rural and suburban areas. These loans don't require a down payment or mortgage insurance, but they do come with upfront and annual fees. Check the USDA's website to see if your income and desired property fall within the eligibility criteria. Get quotes from lenders offering both USDA and conventional mortgages to find the best option for your needs.
State and Local Government Programs
Various state and local governments offer mortgage and down payment assistance programs. These programs often include low-down-payment mortgages with reduced-cost mortgage insurance or no PMI requirement. Check with your state's housing finance agency to explore these first-time homebuyer programs. Some programs may even provide grants or financial aid without requiring repayment. Combining a county-based program with a state-level initiative can further increase your financial support.
Energy-Efficient Mortgages (EEMs)
If you're interested in purchasing an energy-efficient home or making energy-efficient improvements to an existing property, consider an EEM. These mortgages can help finance the purchase of Energy Star-certified homes or be used to refinance and make environmentally friendly upgrades. EEMs offer a unique way to get into the housing market while also reducing your carbon footprint.
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Look into state housing finance agencies
If you're a first-time buyer looking to avoid paying private mortgage insurance (PMI), it's worth checking out the programs offered by your state housing finance agency (HFA). HFAs provide a range of products and services to help people become homeowners, and their criteria vary, so it's important to do your research.
State housing finance agencies offer mortgage and down payment assistance programs, which can include low-down-payment mortgages with reduced-cost mortgage insurance or no PMI at all. Some agencies offer conventional loan programs with fixed interest rates and insured through PMI on the conventional market. Others offer FHA loans, which are insured by the Federal Housing Administration and come with their own mortgage insurance requirements. VA loans, backed by the Department of Veterans Affairs, are another option provided by some HFAs. These loans are for current and former service members and eligible spouses, and they don't require a down payment or mortgage insurance, although there is usually a one-time funding fee.
Some state housing finance agencies also offer down payment assistance in the form of a second or subordinate loan. These loans are often called "silent seconds", meaning you don't have to make payments on the loan until your home is sold, refinanced, or paid off in full. This can help keep your monthly mortgage payments affordable.
In addition to these programs, state housing finance agencies may also offer mortgage tax credit certificates, homeownership education, and counselling programs that can facilitate mortgage lending by insured depository institutions. Many of these products can be used in conjunction with other federal and government-sponsored programs, so it's worth exploring the options available in your state.
Remember that the availability and specifics of these programs can change over time, so be sure to check with your state's HFA for the most up-to-date information.
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Consider a VA or USDA loan
If you're a veteran, service member, or eligible spouse, you may want to consider a VA loan. Backed by the Department of Veterans Affairs, VA loans do not require a down payment or monthly mortgage insurance, making them an attractive option for first-time buyers. Instead of mortgage insurance, VA loans have a one-time funding fee, which you can include in your loan and pay off over time. This fee helps lower the cost of the loan for US taxpayers. However, you may be exempt from paying this fee if you meet certain requirements, such as receiving VA compensation for a service-connected disability.
VA loans offer competitive interest rates, and you can use them to buy, build, improve, or repair a home. Additionally, sellers or builders can offer credits to cover some or all of the buyer's closing costs, which can be a significant advantage. However, it's important to note that VA loans may have specific eligibility requirements that you need to meet.
USDA loans, backed by the US Department of Agriculture, are another option to consider. These loans are designed for lower- and moderate-income buyers in designated rural and suburban areas. USDA loans do not require a down payment, which can be a significant barrier to homeownership for many first-time buyers. While USDA loans don't technically require mortgage insurance, they do have guarantee fees applied annually and upfront, which function similarly to mortgage insurance. These fees are relatively low compared to other mortgage types, making USDA loans an incredibly affordable option.
USDA loans also offer flexibility in using the funds. You can use a USDA loan to purchase, build, rehabilitate, improve, or relocate a dwelling in an eligible rural area. This flexibility can be beneficial for buyers looking to create a home that suits their specific needs. Additionally, USDA loans can be advantageous for those with lower credit scores, as lenders may be more lenient with their requirements.
Both VA and USDA loans provide opportunities for first-time buyers to enter the housing market without the burden of a down payment or high mortgage insurance costs. By considering these loan options, buyers can achieve their dream of homeownership while keeping their financial commitments manageable.
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Frequently asked questions
PMI stands for Private Mortgage Insurance, an added cost homebuyers must pay if they purchase a home with a down payment of less than 20%.
First-time buyers can avoid paying PMI by exploring government mortgage programs, opting for a 20% down payment, or using a piggyback loan.
A piggyback loan is a second mortgage taken out at the same time as the first mortgage, so the buyer holds two mortgages with different interest rates.
The USDA Rural Development Guaranteed Housing Loan Program is a government mortgage program that backs USDA loans for first-time buyers in rural areas. VA loans, backed by the Department of Veterans Affairs, are another option for current and veteran service members and eligible spouses.
Another way to avoid PMI is to opt for lender-paid mortgage insurance (LPMI), although this often increases the interest rate on the mortgage.
