Do you not have 20% to put down on a home and fear the PMI that you will face? Did you know that you might not have to pay PMI on your mortgage even if you don’t put 20% down on it? There are ways, but you have to think outside of the box.
Get a VA Loan – for Veterans
If you were in the military, Reserves, or National Guard, you may be eligible for a VA loan. If this is the case, you not only don’t need 20% down on a home, you don’t need any money down on it. The VA guarantees your loan to VA lenders. This means that if you default, the VA will pay the lender back a portion of the loan that they lost.
Of course, this is only for veterans of the military. If you served in the regular military, you must serve at least 90 days during wartime or 181 days during peacetime. You must also have an honorable discharge. If you served in the National Guard or Reserves, you must serve at least 6 years before you are eligible.
Once you are eligible for the program, all you need is a 620 credit score, maximum 43% total debt ratio, and a stable employment history to get approved for the VA loan. The nice thing about the VA program is that they don’t charge any type of mortgage insurance despite the lack of down payment requirements. The only fee the VA charges is the upfront funding fee. This is a percentage of your loan amount that you pay at the closing to the VA. This is how the VA continues to have the ability to guarantee loans for veterans
Get Help With the Down Payment
If you aren’t a veteran and you have decent credit, you may qualify for a conventional loan. Typically, these loans require a 20% down payment or you must pay PMI. But, the entire down payment doesn’t have to come from you. In fact, you can accept gift funds from relatives or your employer. You can also apply for a second mortgage, known as a piggyback mortgage for a part of the funds.
There isn’t a set amount of money that you must put down on a conventional loan when you have assistance from either a gift or a second mortgage. This means you can get a decently sized gift and avoid PMI.
If you take out a second mortgage, you can also avoid PMI. Typically, borrowers take out what is called an 80/10/10. The first number, 80, stands for the 80% first mortgage that you’ll get to buy the home. This is how you avoid PMI. The second number, 10, stands for a 10% second mortgage that you will use as your down payment on the home. The final number, 10, is the 10% down payment that comes from your own funds, assuming you have it. This way you have a total of a 20% down payment and you can avoid PMI.
Get Help From the Lender
The final way to avoid PMI is to ask for lender-paid PMI. While this doesn’t avoid the cost, it does avoid it coming from your own pocket. When the lender pays it, they pay the entire premium amount for the life of the loan upfront. In exchange, the lender will charge you a slightly higher interest rate in order to offset the cost that they covered for you.
The lender-paid PMI is only a good idea if you will stay in the home for the long-term. As we discussed above, the lender pays the entire amount of the premium. If you move after a few years, that means that the lender paid for much more premium than was necessary. While it didn’t come out of your own pocket, you paid an inflated interest rate and possibly closing costs in order for the lender to cover it for you.
As you can see, you can get around PMI; you just have to be a little creative. With one of these methods, you can get around the pesky Private Mortgage Insurance that can inflate your mortgage payment for many years. It’s a good idea to shop around with different lenders to find the one that offers the best program despite your unique circumstances.