# How to Get a Loan Without Private Mortgage Insurance (PMI)

Five Methods:Making a Large Enough Down PaymentUsing a Piggyback LoanUsing Lender-Paid Mortgage Insurance (LPMI)Using a Veterans Administration LoanCancelling PMI After You Have Been Paying

For many individuals and families who are looking at purchasing a home, or any other real estate, private mortgage insurance (PMI) can be a major cost factor. PMI is a requirement that comes into play if the buyer’s initial down payment is less than 20% of the purchase price. PMI is designed to guarantee the bank’s interest in the property in case the buyer is unable to keep up with the mortgage payments. Many banks advertise loans that only require low down payments, but the cost of PMI may be excessive. It is important to understand that there are several ways to avoid PMI.

## Steps

### Method 1 Making a Large Enough Down Payment

- 1
**Calculate your “Loan to Value” ratio.**The Loan to Value ratio, sometimes abbreviated LTV, is the ratio that measures the amount of the loan compared to the value of the house. To avoid PMI, for most loans, the LTV needs to be 80% or less. Calculating the LTV is a simple matter of dividing the amount of the loan (the amount you need to borrow) by the price of the house.- Suppose a couple wants to buy a home priced at $200,000, and they have $20,000 in savings. They need to borrow the remaining $180,000, so the LTV is 180,000/200,000 = 0.90 or 90%.
- Suppose someone else wants to buy a home priced at $100,000, but that person has the same $20,000 in savings. The loan this time is $80,000, so the LTV is 80,000/110,000 = .80 or 80%.

- 2
**Make the largest down payment you can afford.**Paying PMI has been described as “giving money away,”^{[1]}so you should try to avoid it if you can. You can do this by making a large enough down payment. Generally, to avoid PMI, you need to have a down payment of 20% of the purchase price of the house.^{[2]}^{[3]}Banks may offer deals that look attractive to first-time home buyers because they allow low down payments. However, the additional PMI payments can become excessive.^{[4]}- You should usually try to make as large a down payment as possible. If you know that buying a home is in your future, it is important to start saving early. Consider borrowing from family members or other sources, if possible.

- 3
**Determine your loan.**Figure out what you can afford to borrow, based on your savings. A simple calculation, based on what you have saved, can help determine your maximum loan for an LTV of less than 80%. Start with the amount of the down payment you can afford. Multiply by 4. This will tell you how much you can afford to borrow. Adding together that amount and the amount of your down payment will tell you the purchase price that you can afford.- For example, consider a couple who have saved $30,000 and want to buy a house without paying PMI. $30,000 x 4 = $120,000, which is the amount of the loan they can afford. Adding together $30,000+$120,000 = $150,000, which is the highest price for a house that they can afford without paying PMI.
- Suppose another couple has $50,000 available for a down payment and wants to avoid PMI. $50,000 x 4 = $200,000, which is the amount of the loan they can afford. Adding together $50,000+$200,000 = $250,000, which is the highest price of the house that this couple can afford without paying PMI.

- 4
**Use an online loan calculator.**The above examples provide very simple estimates of your borrowing ability. For more precise calculations, which take into account the interest rate and duration of the loan, several loan calculator programs are readily available online.^{[5]}

### Method 2 Using a Piggyback Loan

- 1
**Research the "piggyback" option.**A “piggyback loan” will allow someone with a low down payment, or even no down payment, to purchase a home without PMI. This is actually a name for getting two separate loans. The first loan will be for of 80% of the property’s value, so there will be no PMI requirement. Then the borrower will get a second loan that "piggybacks" on the first one, to cover the rest of the money that is needed.^{[6]}Following the downturn of the housing market, many banks have limited the piggyback option to 10% of the value, requiring the borrower to make at least a 10% down payment.^{[7]}This is often called an “80/10/10” loan, referring to the 80% first loan, 10% piggyback loan, and 10% down payment.^{[8]}^{[9]}- Suppose a buyer wants to buy a property for $200,000. With an 80/10/10 piggyback loan, he would borrow $160,000 on a first mortgage (80%), $20,000 on a second, piggyback mortgage (10%), and make a down payment of $20,000 (10%).
- Imagine another buyer wants to buy a property for $450,000 using an 80/10/10 piggyback loan. His first mortgage would be $360,000 (80%); the second, piggyback mortgage would be $45,000 (10%); and the down payment would be $45,000 (10%).

- 2
**Calculate the value.**A piggyback loan is not automatically going to be cheaper than a traditional loan that includes PMI payments. You can use an online loan calculator to help you figure out which is preferable. One example of such a calculator is http://www.goodmortgage.com/Calculators/PMI_Or_Piggyback.html. - 3
**Understand the drawbacks.**The second loan is typically for a much shorter term than the first, often requiring full payoff in about ten years.^{[10]}^{[11]}While the piggyback loan lets you cut out PMI payments, you must realize that you will be making monthly payments on two loans at once. A buyer using this option will need to be sure that he can afford the monthly payments on both loans together.

### Method 3 Using Lender-Paid Mortgage Insurance (LPMI)

- 1
**Research the option.**Some lenders will allow you to get a loan with less than a 20% down payment. Ordinarily, this would require you to make monthly PMI payments, at least until you pay down a good portion of the loan. However, if the lender offers the Lender-Paid Mortgage Insurance (LPMI) option, then the lender will include the amount of the insurance in the loan itself. This usually requires a slightly higher interest rate, but the overall cost over time winds up being less than paying PMI yourself.^{[12]} - 2
**Shop around for rates.**Just as lenders have different mortgage rates for "regular" loans, they also have different rates for LPMI loans. You will want to shop around online or by calling local lenders in your area to find who has the best lending rates for this option. Be sure to make it clear that you are asking about the LPMI option. - 3
**Calculate the costs.**You will need to compare the monthly payments under a regular loan, at a lower rate with PMI payments added, to the monthly payment of an LPMI loan, at a higher rate without PMI.^{[13]}To get these figures, you will need to use a loan calculator online, and check with lenders about their LPMI interest rates.- Suppose someone wants to purchase a property worth $100,000, with an LTV of 90% (that means a $10,000 down payment). This would require monthly PMI payments of, in this example, $52.
- This buyer can find a 30-year mortgage at 3.75%, which results in monthly payments of $463.12 (loan payment) + $52 (PMI) = $515.12 (monthly payment).
- Alternatively, the same buyer finds that the lender will give a 30-year mortgage at 4.00% with the insurance rolled in. This results in monthly payments of $477.42 (loan) + $0 (no PMI) = $477.42. The LPMI monthly payment is lower in this instance (but it won't always be).

- Suppose someone wants to purchase a property worth $100,000, with an LTV of 90% (that means a $10,000 down payment). This would require monthly PMI payments of, in this example, $52.

### Method 4 Using a Veterans Administration Loan

- 1
**Determine if you qualify.**The Veterans Benefits Administration (VA) guarantees home loans to qualified veterans and their eligible dependents, with several benefits.^{[14]}These loans can be especially great because they require no PMI, no matter what your down payment is. To qualify, you must:^{[15]}^{[16]}- buy the home for personal occupancy
- have been honorably discharged
- meet service requirements in the military or National Guard of 90 days or more, depending on the actual years when the service occurred
^{[17]} - spouses may be eligible under certain circumstances.
^{[18]}

- 2
**Locate a lender.**You need to find a lender that participates in the VA program.^{[19]}You can ask your own local bank(s) about participation, or simply search for "VA lenders" online. The U.S. Department of Veterans Affairs publishes an annual list of the top 300 VA Lenders listed by the volume of their VA loans.^{[20]} - 3
**Get a Certificate of Eligibility (COE).**A Certificate of Eligibility verifies to the lender that you are eligible for a VA loan. The U.S. Department of Veterans Affairs web site, http://www.knowva.ebenefits.va.gov/system/templates/selfservice/va_ss/#!portal/554400000001018/article/554400000006303, will take you through the steps to obtain the COE. - 4
**Find a home and sign a purchase agreement.**This locks in the negotiated terms of the sale between you and the owner. Be sure to include a clause that allows you to cancel the sale in case you cannot secure the VA loan.^{[21]} - 5
**Apply for your VA loan.**A lender who participates in the VA program will know the remaining requirements and forms that are required for closing the loan.^{[22]}

### Method 5 Cancelling PMI After You Have Been Paying

- 1
**Understand your rights.**PMI is an insurance policy to protect the lender, if your LTV is 80% or more. If you initiate a loan with less than a 20% down payment, you will be in this situation. However, as you pay down your loan over time, your LTV will decrease and you may be able to terminate the PMI payments.^{[23]}- Suppose a buyer buys a $200,000 property with a $20,000 (10%) down payment. His LTV at this point is 180,000/200,000 = 0.90 or 90%. But over time, as he makes his monthly mortgage payments, he will reach a point where the amount of the remaining loan is only $160,000. The LTV is now 160,000/200,000 = 0.8 or 80%. At this point, he can contact his bank to terminate the PMI.
- Consider another buyer who buys a $300,000 property with a $25,000 (8.3%) down payment. His LTV at the start is therefore 275,000/300,000 = 0.917 or 91.7%. But suppose that, as he is paying down his mortgage, the property values in his area also increase, so that the value of his property climbs to $320,000. When he reduces the amount of his loan to $256,000, he will be at an LTV of 80%. 256,000/320,000 = 0.8 or 80%, and he can now ask the bank to terminate the PMI.

- 2
**Submit a written cancellation request.**If you believe that your LTV has dropped below 80%, you may send a written request to your lender to terminate your PMI. Your lender is required to honor your request if:^{[24]}- you have a good payment history
- your payments are current
- you satisfy any requirements the lender makes regarding proof of the property's value.

- 3
**Check your regular mortgage statements for automatic PMI information.**The lender is required by law to terminate your PMI when your LTV reaches 78% or lower. For this to occur, your loan payments must be current in order for the PMI to terminate.^{[25]}

## Tips

- Look at tax-deductible status for PMI. If you do have private mortgage insurance as a part of your loan agreement, you may be able to deduct this amount from your taxes. The specifics of this issue are different for every household, so do some detailed research or contact your tax preparer to figure out how PMI will affect your overall tax burden.

## Warnings

- The focus of this article is on avoiding PMI, by measuring the LTV of a loan. Another important consideration, not addressed here, is the ongoing cost of paying off the loan. Use an online loan calculator, available at many real estate or lending agency web sites, to determine what the monthly cost will be for your loan, considering interest rate, length of the loan, down payment, and other estimated costs of the loan.

## Sources and Citations

- ↑ 2.jpg|center]]http://www.investopedia.com/articles/pf/07/avoid_pmi.asp#dra
- ↑ http://themortgagereports.com/17861/private-mortgage-insurance-avoid-pmi-mortgage-rates
- ↑ https://www.guaranteedrate.com/resources/what-is-pmi-and-how-can-i-avoid-paying-it
- ↑ http://www.investopedia.com/articles/pf/07/avoid_pmi.asp#dra
- ↑ http://www.hsh.com/down-payment-calculator.html
- ↑ http://www.hsh.com/finance/mortgage/how-can-i-avoid-mortgage-insurance.html
- ↑ http://www.nytimes.com/2014/12/21/realestate/piggyback-loans-revisited.html?_r=0
- ↑ http://www.nytimes.com/2014/12/21/realestate/piggyback-loans-revisited.html?_r=0
- ↑ http://mymortgageinsider.com/80-10-10-piggyback-mortgage/
- ↑ http://www.hsh.com/finance/mortgage/how-can-i-avoid-mortgage-insurance.html
- ↑ http://mymortgageinsider.com/80-10-10-piggyback-mortgage/
- ↑ http://www.bankrate.com/finance/mortgages/lender-paid-mortgage-insurance-pros-cons.aspx
- ↑ http://www.bankrate.com/finance/mortgages/lender-paid-mortgage-insurance-pros-cons.aspx
- ↑ https://www.veteransunited.com/va-loans/
- ↑ http://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp
- ↑ http://www.veteran.com/va-loan-guide/?src=adw&adg=glend&desc=eligibility&gclid=CK3JgajAm8wCFdRZhgodOFME9A
- ↑ http://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp
- ↑ http://www.benefits.va.gov/homeloans/purchaseco_eligibility.asp
- ↑ http://www.benefits.va.gov/homeloans/purchaseco_buy_process.asp
- ↑ http://www.benefits.va.gov/homeloans/documents/docs/2015_total_volume.pdf
- ↑ http://www.benefits.va.gov/homeloans/purchaseco_buy_process.asp
- ↑ http://www.benefits.va.gov/homeloans/purchaseco_buy_process.asp
- ↑ http://www.federalreserve.gov/boarddocs/caletters/2004/0405/CA04-5Attach1.pdf
- ↑ http://www.federalreserve.gov/boarddocs/caletters/2004/0405/CA04-5Attach1.pdf
- ↑ http://www.federalreserve.gov/boarddocs/caletters/2004/0405/CA04-5Attach1.pdf

## Article Info

Categories: Mortgages and Loans