If you don’t put 20% down on a home, you will likely pay Private Mortgage Insurance or PMI. There are ways around it, though! You have numerous options at your disposal.
The most obvious way to avoid paying Private Mortgage Insurance is to make a 20% down payment. If you have the time to save, this is your best method. If you have good credit and a debt ratio that doesn’t exceed 28% on the front-end and 36% on the back-end, you are in good shape. If you don’t have the time to save, or your credit/debt ratio won’t help you qualify, you have other options you can try.
Keep reading to see which options may pertain to you.
Try a Piggyback Loan to Avoid PMI
If you think you’ll qualify for conventional financing because you have a credit score over 680 and debt ratios within the 28/36 guidelines, you may still get a conventional loan. You’ll just need help with the down payment portion of the purchase process. You can do this with an 80/10/10, otherwise known as a Piggyback Loan.
The 80% signifies the financing you’ll receive from the conventional loan. Because it’s only 80% of the home’s value, you won’t pay PMI. The next 10% pertains to a 10% home equity loan that you’ll get at the same time as the conventional loan. The final 10% is your down payment. Here’s how it works:
You want to buy a $200,000 home. You have $20,000 to put down on the home. This Is your 10% contribution. You can secure $160,000 financing from your conventional lender. You then apply for a home equity loan for the remaining $20,000. This would be a simultaneously closed loan with your first mortgage. The second mortgage would cover the remaining portion of the down payment, giving you the maximum 80% LTV on your first mortgage.
Many borrowers secure the second mortgage from the same lender as the first mortgage. This helps to keep things simple. But if you want to shop around to find a better rate or closing costs, you can do so. You’ll just have a little more work to do at the closing to make sure everything falls into place at the same time.
Subprime Loans Offer an Alternative
Subprime loans aren’t just for borrowers that have bad credit. In fact, they aren’t bad loans at all. They are meant for borrowers that don’t meet the conventional loan guidelines and that don’t want a government-backed loan. A borrower without 20% to put down on a home is the perfect candidate.
Subprime loans do not charge PMI. In fact, each lender will have their own programs and requirements. Because subprime lenders usually keep the loans on their own books, they can call the shots, so to speak. They can be as strict or lenient as they want.
We recommend that you apply for a loan with several subprime lenders if this is the way you decide to go. This way you know all of your options and can choose the one that suits your needs the most. Make sure you pay close attention to the terms and cost of the loan as well. Since subprime loans aren’t your standard Fannie Mae or FHA loans, they may have terms you are not used to seeing.
Ask the Seller for Help
One final way to avoid PMI is to ask the seller for a seller concession for the amount of the PMI. This is the full amount of the PMI, though. In other words, it’s what you would pay over the life of the loan if you were to keep it.
Once you know the cost of the lump sum payment for the PMI, you can ask the seller to increase the purchase price of the home the appropriate amount. As long as the home’s value is there, you can do this. The seller then gives you a seller credit at the closing for the amount of the PMI. You don’t have to take any money out of your own pocket and you don’t have to pay PMI.
There’s a tradeoff, though. In exchange for the higher purchase price, you have a higher loan amount. Basically, you borrowed the money for the lump sum PMI. It won’t cost you as much per month as it would if you paid PMI directly, but it will cost you some money in interest over the life of the loan.
The seller walks away with the same profit he would have made with the lower sales price and no seller concession, so many sellers are willing to help you this way.
It is possible to avoid PMI, you just have to think outside of the box when securing a loan. It’s best if you exhaust all of your options so that you know which are the best choices for you. You can then compare the total cost of each loan to determine which will make the most financial sense in the end.