How to Avoid PMI Without a 20% Down Payment | 2024

10 ways to get a mortgage with no PMI

Some home buyers are keen on understanding how to avoid private mortgage insurance (PMI) at all costs.

Even though it enables buying a home with less than 20% down, PMI adds an extra monthly fee.

Fortunately, there are ways to make a down payment of less than 20% without paying PMI premiums on your monthly mortgage payment. Here’s how.

In this article (Skip to…)

• Ways to avoid PMI
• How much is PMI?
• PMI vs. FHA MIP
• Getting rid of PMI
• FAQ

>Related: How to buy a house with $0 down: First-time home buyer

What is PMI?

PMI is an acronym for private mortgage insurance, which is a type of insurance commonly required by lenders when home buyers make a down payment of less than 20% of the home’s value.

Mortgage insurance protects the lender in case the borrower defaults on the loan. It’s typically rolled into the monthly mortgage payment and can add a significant amount to the overall cost of the loan.

Understanding how to avoid PMI can be beneficial for homebuyers. For instance, if a buyer purchases a home for $300,000 and only makes a 10% down payment, which amounts to $30,000, they would typically be required to pay PMI.

This is because the down payment is less than 20% of the home’s value. To avoid PMI in this scenario, the buyer would need to increase their down payment to at least $60,000, which is 20% of the home’s purchase price.

Other strategies to avoid PMI include considering lender-paid mortgage insurance or exploring special first-time home buyer loans without PMI. We go over your options in more detail below.

How to avoid PMI

Understanding how to avoid PMI involves researching various mortgage products and their requirements. Keep in mind that private mortgage insurance protects the lender in the event of a loan default. This is why lenders require PMI when a buyer cannot put down at least 20% of the home’s price.

The good news is that even if you don’t have 20% down, there are numerous options available to you to help you avoid paying PMI.

1. Get the lender to pay for your mortgage insurance

Lender-Paid Mortgage Insurance (LPMI) is exactly what it sounds like: The mortgage lender covers your mortgage insurance so you don’t have to pay out of pocket. This is one way to avoid PMI.

Of course, there’s a catch.

If the lender pays your mortgage insurance, you’ll pay a higher interest rate in return. In reality, you’re still paying for PMI, but it’s in the form of an interest payment instead of monthly premiums.

You can get a lender-paid mortgage insurance loan with as little as 3% down. However, the rate will be fairly high on that loan, especially if you don’t have an awesome credit score.

Following is an example showing the monthly cost of LPMI versus traditional PMI with a 720 credit score.

*Rates shown are for sample purposes only. Your own rate will be different. Payments assume a $250,000 home price in WA with a 30-year fixed-rate mortgage. 

In this case, the LPMI does save you a bit of money each month.

However, you can never cancel LPMI, even if you pay your mortgage balance down below 80% of your home value. Traditional PMI goes away when your loan balance hits 78% of the home’s value. But your LPMI rate will not drop at that point.

Instead, you’d continue paying the higher LPMI rate for the duration of the loan, or until refinancing. When considering how to avoid PMI, think about how long you plan to stay in the home, whether you intend to convert it into a rental property, or other long-term objectives before deciding on LPMI.

2. Use a piggyback loan with 10% down and no PMI

To understand how to avoid PMI, consider using a piggyback mortgage (also called an 80-10-10 loan). This is a unique second loan where the buyer needs only 10% down in cash.

The buyer then takes out a second mortgage loan, which provides another 10% of the home’s purchase price. So they effectively have a 20% down payment and do not have to pay mortgage insurance.

The most common piggyback loan arrangement looks like this:

• An 80% first mortgage
• A 10% second mortgage (usually a home equity line of credit)
• A 10% down payment

This structure is often called an “80/10/10.”

For buyers of condominiums, 75/15/10 piggyback loans are more common, mainly because mortgage rates are higher for condos with less than 25% down.

The second mortgage is often from the same bank or lender as the first mortgage. But you might have to find your own second mortgage if your lender does not offer one. A credit union or local bank is a great source for this type of loan.

Just make sure the second lender knows you are purchasing a home and that you need the financing completed on a specific day. Let them know your closing date and make sure they can accommodate a quick closing if necessary.

Piggyback loans can be an excellent method for obtaining a conventional loan without PMI, even with less than a 20% down payment.

3. Consider home loans without pmi

From time to time, lenders and banks create their own programs that allow a low down payment with no PMI. These may even have additional perks for first-time home buyers, lower-income home buyers, or certain professionals (like teachers and doctors).

Researching these specialized programs is a key step in understanding how to avoid PMI for those who may not have a large down payment saved. Here are just a few examples of low down payment mortgages with no PMI:

• Neighborhood Assistance Corporation of America (NACA): This organization focuses on providing homeownership opportunities to low- to moderate-income individuals or those buying in underserved communities. NACA touts no down payment, no closing costs, no points, below-market rates, and best of all, no PMI. Keep in mind that this loan is only for those who fit their criteria, and it’s unclear how many qualify for the loan
• Bank of America: At the time of this writing, Bank of America offers the Affordable Loan Solution mortgage. It requires just 3% down and does not require PMI. Pre-homeownership counseling is required through B of A’s network of counselors, and maximum income limits apply
• CitiMortgage: This nationwide lender offers the HomeRun Mortgage, which offers loans up to $ (higher in high-cost areas) with 3% down and no PMI. Homeownership education is required, but these courses typically require a small time commitment
• Movement Mortgage: This all-digital lender offers the “Dream to Own" mortgage, a conventional loan program with no mortgage insurance required. It also allows down payment and closing cost assistance up to 4% of the home price. A minimum credit score of 660 is required to qualify
• Caliber Home Loans: If you’re buying a high-priced home, Caliber’s “Elite Access" program offers jumbo loans with just 5% down and no mortgage insurance. Currently, a jumbo loan is anything over $ in most areas. Borrowers need at least a 740 FICO score to qualify and nine months’ worth of mortgage payments in cash reserves (savings)

The tradeoff here is that home loans without PMI usually have higher mortgage rates. And they often require a higher credit score to qualify.

Keep in mind that lenders can change proprietary mortgage programs at any time.

These programs are current at the time of writing, but double-check with the lender to see what’s available before applying.

4. Look into state or local homebuyer assistance programs

Numerous state and local governments, as well as a few nonprofit organizations, offer programs specifically designed for borrowers who are seeking a first-time home buyer with no PMI option.

These programs can take various forms, such as grants, tax credits, subsidized loans, and down payment assistance.

Some of these initiatives might provide enough support to help a buyer achieve the 20% down payment threshold, thus avoiding PMI.

With an estimated 2,000 to 2,500 assistance programs available across the United States, learning how to avoid PMI becomes possible. See our guide to homebuyer assistance in every state.

5. Gifts funds from family

If you’re wondering how to avoid PMI insurance, a common strategy is to use gift money to reach the 20% threshold. Lenders will usually allow gift money to be used for a down payment, but there are some stipulations. The gift money must truly be a gift, not a loan in disguise. This usually means that the person giving the gift must provide a “gift letter” to the lender, affirming that the money is a gift and not expected to be repaid.

The source of the gift can also matter. Gifts from immediate family members are usually acceptable, while gifts from more distant relatives, friends, or employers may not be. Some lenders also have limits on how much gift money can be used as a percentage of the down payment, especially if you’re putting down less than 20%.

6. Purchase a less expensive home

If you opt for a less expensive home, you may find it easier to make a 20% down payment. It’s a popular way for those wanting to know how to avoid PMI.

For instance, purchasing a home priced at $200,000 instead of $300,000 means your 20% down payment reduces from $60,000 to $40,000. The smaller the mortgage, the lower the down payment required to meet the 20% threshold.

Buying a less expensive home can be particularly effective for those open to living in a smaller home or in a less costly area.

7. Check your eligibility for a VA loan

If you’re a veteran or active-duty service member who wants to understand how to avoid PMI without 20% down, a VA loan is likely your best option.

These loans without PMI are guaranteed by the Department of Veterans Affairs and offer significant benefits, including no requirement for a down payment. Additionally, the VA’s backing of these loans often results in more favorable mortgage interest rates and terms compared to conventional loans.

You’ll have to pay a one-time upfront Funding Fee to use a VA loan, which varies between 1.4% and 3.6% of the loan amount. The exact cost depends on your down payment and whether you’ve previously utilized a VA loan. It’s important to note that borrowers have the option of not making any down payment on a VA loan.

Despite the Funding Fee, the overall cost is often less expensive compared to what others pay for monthly mortgage insurance. Being able to avoid PMI, coupled with exceptionally low rates, is what makes a VA loan such a great deal for qualified veterans.

8. Buy real estate that will appreciate sharply

One effective method on how to avoid PMI involves purchasing property that is likely to appreciate in value. Once your home’s value increases sufficiently to lower your loan-to-value ratio (LTV) below 80%, some banks may permit you to request PMI cancellation. Typically, banks will require a professional appraisal to support this request.

It’s important to remember that real estate values usually don’t surge significantly over a short period.

9. Consider single-premium PMI

While this method doesn’t technically eliminate mortgage insurance premiums, you will avoid the recurring payments. Rather than paying PMI in monthly installments, you pay the entire PMI premium at closing.

This option is beneficial if you can afford it and anticipate that it will take a long time to cancel PMI. However, if you sell or refinance early, you might not recoup the cost.

10. Look at split-premium PMI

With split-premium PMI, you first pay a larger upfront fee to cover a portion of the costs, which reduces your monthly payment obligations later on.

This combines the advantages and disadvantages of borrower-paid and single-premium PMI. The amount of money required to pay the upfront premium is modest. As a result, your monthly expenses will be lower.

If your debt-to-income ratio (DTI) is on the higher end, split-premium mortgage insurance may also be beneficial. It enables you to reduce your potential mortgage payment to prevent raising your DTI above the threshold required for loan eligibility.

How much does PMI cost?

In general, PMI costs range from 0.30% to 1.15% of your loan balance annually. This amount will be broken into 12 installments and paid along with your monthly mortgage payment.

Your loan term, loan-to-value ratio (which is based on your down payment), and credit score all play a role in determining your PMI rate.

Here’s an example:

• Home price: $250,000
• Credit score: 740
• Down payment: 5% ($12,500)
• Loan: $237,500 30-year fixed-rate mortgage
• Annual PMI: $1,236
• Monthly PMI cost: $103

Because PMI is calculated based on your loan amount, your total PMI cost will go down each year as you pay off your loan balance.

How PMI is calculated

Learning how to avoid PMI can significantly reduce your monthly mortgage expenses. And like all insurance policies, the cost of PMI is risk-based. Making a smaller down payment or getting an adjustable-rate mortgage, for example, puts your lender at greater risk, so you should expect your PMI costs to run higher.

When you can make a 20% down payment (80% loan-to-value ratio), you lower the lender’s risk to the point that you won’t need to pay PMI at all.

However, PMI premiums change regularly. From state to state and lender to lender, PMI costs will vary.

And while PMI may be your only option when purchasing a new home, not buying a home may be an even less fruitful investment when you consider that historically, real estate has grown in value.

Conventional PMI vs FHA MIP

Researching various mortgage options is a key step in understanding how to avoid PMI on your home loan. And when evaluating your options, it’s important to understand the difference between PMI (private mortgage insurance) and MIP (mortgage insurance premium).

• PMI (private mortgage insurance) is applied to conventional mortgages. It can be canceled at 80% loan-to-value ratio (LTV) or removed automatically at 78% LTV
• MIP (mortgage insurance premium) is applied to loans insured by the Federal Housing Administration (FHA loans). MIP cannot be canceled; borrowers pay MIP for the life of the loan. However, in some cases, MIP can be removed when the homeowner put more than 10% down and has paid MIP for a full 11 years

Because of the FHA’s mortgage insurance rules, many borrowers prefer conventional PMI. It will eventually fall off on its own, whereas most borrowers with FHA MIP are stuck paying it until they refinance or pay off their loan.

The same is true for USDA loans, which require their own type of mortgage insurance called a guarantee fee.

You can read more about how to remove MIP here.

How do I get rid of PMI once I’ve purchased a home?

PMI can be canceled once your loan’s principal balance falls to 80% of your home’s original appraised value. For homeowners with existing PMI, refinancing can be an effective strategy to eliminate any type of mortgage insurance, provided the new loan amount is 80% or less of the home’s current value.

How to avoid PMI is particularly relevant for those considering refinancing their mortgage. That’s because enders have certain requirements for PMI cancellation that include:

• A history of timely payments
• A minimum number of payments must be made (usually 12)
• Or, the absence of a second mortgage

The Homeowners Protection Act of 1998 mandates lenders to automatically terminate PMI at 78% loan-to-value (LTV) based on the original purchase price or appraised value, as long as you are current on your loan. However, homeowners must proactively contact their lender for PMI cancellation once they reach 80% LTV.

FAQ: How to avoid pmi

Final thought about how to avoid PMI

Unraveling how to avoid PMI is a key step for first-time home buyers with less than 20% down. The good news is that there are plenty of ways to get around mortgage insurance.

If you want to avoid PMI but don’t have 20% down, talk to a few lenders about your options. Chances are, you can get away without PMI and still have a reasonable monthly payment.