Lenders like homebuyers to have 20 percent equity to provide a cushion for defaults. A borrower who doesn’t make a 20 percent down payment on a Conventional Loan will be charged Private Mortgage Insurance (PMI). Monthly mortgage insurance covers this risk so that a lender retains 20 percent equity.
Mortgage insurance requirements can vary by loan type:
- Down payment minimum: 3 percent; gift funds are allowed, with no minimum contribution required.
- Other considerations: Debt-to-income ratios are not as flexible as on FHA Loans.
- Private Mortgage Insurance (PMI): Typically paid monthly (with an annual premium split over 12 months); can be removed after a borrower reaches 20 percent equity and two years have lapsed.
PMI allows mortgage companies to accept lower down payments. It also enables mortgage lenders to grant loans that would otherwise be considered too risky to be purchased by third-party investors like Fannie Mae and Freddie Mac. Being able to sell loans to investors helps maintain liquidity, enabling lenders to keep granting loans.
Most often, PMI is paid monthly by the borrower. It can also be paid upfront or rolled into the loan. It’s possible to pay PMI as a split premium—part upfront and part rolled into the loan. In some cases, a lender may offer to pay PMI in exchange for a higher mortgage rate or other loan costs.
If you’re paying PMI, you can request removal once your mortgage principal balance reaches 80 percent of your home’s original sale price. This usually requires a minimum of two years on-time payment history. PMI will automatically be removed once your balance reaches 78 percent of your home’s original sale price.
Say goodbye to PMI.
If you think it’s time to cancel your PMI, your Academy Loan Officer is ready to help.
- Down payment minimum: 3.5 percent; gift funds are allowed, with no minimum contribution required.
- Other considerations: Debt-to-income ratios are more flexible than Conventional and USDA Loans.
- Mortgage Insurance Premium (MIP): Charged as an upfront amount, as well as a monthly fee, which remains on the loan for the full term (or 11 years if the homebuyer makes a 10 percent down payment).
Compared to PMI, FHA mortgage insurance can be more expensive, take longer to receive approval, and have fewer payment plan options. FHA mortgage insurance is a good choice for some buyers with credit history problems or limited down payment funds, or for those who might need special assistance.
If you put down less than 10 percent, FHA MIP is included for the life of the loan. In this scenario, FHA mortgage insurance can’t be cancelled. However, some homeowners explore refinancing to a Conventional Loan to remove their mortgage insurance. Your Academy Loan Officer can help you weigh your options.
- Down payment minimum: 0 percent; closing costs can be covered with all gift funds.
- Other considerations: Debt-to-income ratios are more stringent.
- Guarantee Fee and Monthly Fee: Charged as an upfront amount, as well as a monthly fee, which remains on the loan for the full term.
While USDA Loans don’t technically have a mortgage insurance requirement, the USDA Guarantee Fee and Monthly Fee function much like insurance. The Monthly USDA Fee can’t be cancelled and will be paid for the life of the mortgage.