What Is a Conventional Loan Without PMI?
Understand conventional loans and practical ways to secure one without private mortgage insurance (PMI) or eliminate it from your payments.
Many homebuyers aim for a conventional loan, which often includes Private Mortgage Insurance (PMI). However, it is possible to secure a conventional loan without PMI, either initially or through specific actions after closing. This article explains conventional loans, clarifies PMI, and details pathways to avoid or eliminate this insurance, providing a clearer financial picture for homeowners.
Conventional Loans Explained
Conventional loans are mortgages originated and serviced by private financial institutions. Unlike government-backed loans (FHA, VA, USDA), conventional loans do not receive a government guarantee. This means lenders bear greater risk, leading to stricter qualification criteria for borrowers.
These loans adhere to specific guidelines established by Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that purchase many U.S. mortgages. Loans meeting these guidelines are conforming loans, eligible for purchase by these GSEs. The Federal Housing Finance Agency (FHFA) sets annual conforming loan limits, which for most of the U.S. in 2025 is $806,500 for a one-unit property, and up to $1,209,750 in high-cost areas. Conventional loans offer flexibility in terms, including fixed-rate and adjustable-rate options. They require a minimum credit score of around 620; higher scores typically result in better rates.
Private Mortgage Insurance Explained
Private Mortgage Insurance (PMI) is an insurance policy required by lenders for conventional loans with a down payment of less than 20% of the home’s purchase price. Its purpose is to protect the lender, not the borrower, against losses if the borrower defaults. This risk is higher when a borrower has less equity in the property.
PMI is paid as a monthly premium, added to the regular mortgage payment. Its cost varies based on the loan-to-value (LTV) ratio, the borrower’s credit score, and the loan amount. While it adds to monthly housing expenses, PMI allows borrowers to purchase a home with a lower upfront down payment, often as little as 3%.
Avoiding PMI at Loan Inception
The most direct method to avoid Private Mortgage Insurance (PMI) on a conventional loan is to provide a substantial down payment. Lenders do not require PMI when a borrower puts down 20% or more of the home’s purchase price. This 20% down payment results in a loan-to-value (LTV) ratio of 80% or less, significantly reducing the lender’s financial risk.
A lower LTV ratio means more equity in the property, providing a larger buffer for the lender in case of default. For example, on a $400,000 home, a 20% down payment ($80,000) results in a $320,000 loan. This reduces the need for PMI. Borrowers meeting this 20% down payment threshold can avoid monthly PMI premiums, leading to lower overall housing costs.
Eliminating PMI After Loan Closing
Even if a conventional loan includes Private Mortgage Insurance (PMI) at closing, borrowers can eliminate it later. One common method is borrower-initiated cancellation, requested once the loan balance reaches 80% of the home’s original value. Borrowers need a good payment history to qualify. The lender may require a new appraisal to confirm the current market value.
Alternatively, the Homeowners Protection Act (HPA) provides protections regarding PMI termination. Under the HPA, lenders are required to automatically terminate PMI once the loan balance reaches 78% of the home’s original value, provided the borrower is current on payments. The HPA also stipulates PMI must terminate at the loan’s amortization schedule midpoint, if payments are current, even if the 78% LTV threshold is not met.