PMI stands for "Private Mortgage Insurance." It's a way for lenders to cover the risks associated with lending money to borrowers.
In the event that you default on your down payment and end up in foreclosure, PMI protects the lender.
Typically, if you only provide 10% of a down payment on your mortgage instead of the more commonly accepted 20%, lenders will require you to take out PMI, which will be a monthly payment tacked on to your mortgage.
Why? Because they see you as a riskier investment. If the bank can find a buyer that's willing to put 20% down, that's significantly less risky than someone who's only willing to put 10% down.
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Is There Any Way Around PMI?
But even if you don’t have a huge amount of savings stashed away, the good news is that you do have options. Here are several of the most common ways home buyers avoid PMI without putting down 20% up front.
Military Borrowers Can Take Out a VA loan
For American veterans, current military members, reservists, and some surviving spouses, the US Department of Veterans Affairs has your back.
The principal aim of the VA loan program is to make sure that American military members can afford appropriate housing with no down payment.
That means that you're not going to have to pay PMI, no matter how small your down payment.
Piggyback Loan on Your Mortgage
A piggyback mortgage is any additional mortgage taken on after the principal mortgage that also refers to the same collateral as the principal mortgage.
Is your head spinning yet? Let’s break that down into simpler terms:
In this case, it means that in order to meet the 20% down payment requirement to avoid PMI, you can take out a loan worth 10% of the value of your home on top of your primary mortgage.
This is called an 80/10/10 loan. The first mortgage is for 80% of the total amount, the second mortgage is for 10%, and the down payment is only 10%.
Other Loan Programs That Don't Require PMI
The following institutions have loan programs that don't require PMI, so if you're looking to get out of a PMI payment, they might be a great option:
- Bank of America
- Flagstar Bank
- Neighborhood Assistance Corporation of America
Find Additional Ways to Save
If you’re currently evaluating financing options for an upcoming home purchase, you should partner with an experienced, local real estate agent as a first step.
The right real estate agent can offer helpful advice and point you in the direction of the best lenders, given your specific financial situation and goals.
What’s more, when you work with a Clever Partner Agent, you could qualify for a Home Buyer Rebate, which puts up to 1% of the final sale price of your home back in your hands after closing.
That often translates to thousands of dollars you can apply towards your down payment, mortgage and insurance premiums, closing costs, or moving expenses.
If you’d like to learn more, fill out our online form — one of our team members will reach out to answer any questions you might have and connect you with a top-rated, local buyer’s agent for a no-obligation consultation.