How to Avoid PMI Without a 20% Down Payment

Homebuyers often pay Private Mortgage Insurance (PMI) when securing a mortgage with less than a 20% down payment. This insurance protects the lender against losses if the homeowner defaults. While a 20% down payment is a common goal, it is not always feasible. Several strategies and loan programs can help individuals acquire a home without traditional monthly PMI.

Government-Backed Loan Programs

Government-backed loan programs help homebuyers avoid traditional Private Mortgage Insurance. They make homeownership more accessible by guaranteeing loans to lenders, reducing risk. This often results in lower down payments or no PMI.

VA loans are available to eligible veterans, active-duty service members, and some surviving spouses. They typically require no down payment and do not mandate traditional PMI. Instead, VA loans include a one-time VA funding fee, which helps offset program costs.

This fee ranges from 0.5% to 3.3% of the loan amount, depending on down payment size, prior use of benefits, and loan type. Borrowers often finance this fee into the loan amount, rather than paying it upfront. Certain individuals, like veterans receiving compensation for service-connected disabilities, may be exempt.

USDA loans target low-to-moderate income individuals purchasing homes in eligible rural areas. They typically allow 100% financing, requiring no down payment. USDA loans do not have traditional PMI, but require two guarantee fees: an upfront fee and an annual fee. The upfront fee is 1% of the loan amount and can be financed. The annual fee, 0.35% of the outstanding principal, is paid monthly and recalculated annually as the balance decreases.

Alternative Loan Structures

Private lenders offer loan structures to help borrowers avoid traditional monthly Private Mortgage Insurance. These keep the primary mortgage’s loan-to-value (LTV) ratio at or below 80%, the threshold where PMI is typically not required for conventional loans. While these options circumvent the monthly premium, other costs may be involved.

A common alternative is a “piggyback loan,” often structured as an 80/10/10 or 80/15/5 arrangement. In an 80/10/10 scenario, the borrower takes a first mortgage for 80% of the home’s value, a second mortgage (often a home equity loan or HELOC) for 10%, and makes a 10% down payment. An 80/15/5 structure involves a first mortgage for 80%, a second for 15%, and a 5% down payment. The second mortgage covers the portion of the purchase price that would otherwise necessitate PMI on the first mortgage. While this avoids PMI, borrowers have two mortgage payments and potentially two different interest rates, which could result in higher overall interest costs compared to a single mortgage with PMI.

Lender-Paid Mortgage Insurance (LPMI) is another alternative. With LPMI, the lender pays the mortgage insurance premium for the borrower. In exchange, the lender charges a slightly higher interest rate on the primary mortgage. While borrowers do not see a separate PMI line item, its cost is embedded within the interest rate, spread over the loan’s life. The higher interest rate increases total interest paid, which might exceed traditional PMI costs, especially if the borrower could have canceled PMI after building sufficient equity.

FHA Loans and Mortgage Insurance

Federal Housing Administration (FHA) loans are an option for homebuyers without a large down payment or stellar credit. Insured by the FHA, these mortgages allow lenders to offer flexible qualification criteria, including down payments as low as 3.5%. FHA loans include Mortgage Insurance Premium (MIP), which differs from conventional PMI.

FHA loans require two types of MIP: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (MIP). The UFMIP is a one-time fee, typically 1.75% of the loan amount, usually financed into the loan. The annual MIP is a recurring monthly charge. Its rate varies based on loan amount, term, and loan-to-value (LTV) ratio, generally ranging from 0.15% to 0.75%, with many borrowers paying around 0.55% annually.

A key distinction between FHA MIP and conventional PMI is duration. For most FHA loans with less than a 10% down payment, annual MIP is required for the entire loan term, continuing for the loan’s life unless refinanced. If the down payment is 10% or more, annual MIP can be canceled after 11 years. This contrasts with conventional PMI, which typically cancels once a borrower reaches 20% equity. The mandatory nature and extended duration of FHA MIP mean it facilitates lower down payments but represents an ongoing cost.