Do I have to pay mortgage insurance if I put down less than 20%?

In most cases, mortgage insurance is a requirement when a homebuyer’s down payment is less than 20 percent. Some loans don’t require it, and some down payment assistance programs can also contribute enough to cover the balance. You may even be able to take advantage of lender-paid Private Mortgage Insurance (PMI) to eliminate mortgage insurance requirements.

Mortgage insurance requirements and regulations may not look the same depending on which loan you are getting. Let’s go over the purpose of mortgage insurance, loan differences and your options.

Your down payment not only reduces the amount you have to borrow—it also claims your stake in the home. Without a borrower’s stake in the home, the lender needs something else to guarantee at least partial payment, which is where mortgage insurance comes in.

It’s important to know how mortgage insurance differs depending on the loan program.

Some loan types are designed without mortgage insurance but may come with one-time fees or smaller annual fees. Sometimes the distinction is more nuanced. For example, FHA loans have Mortgage Insurance Premiums (MIP) and Conventional loans come with Private Mortgage Insurance (PMI) requirements. While they sound similar, they have significant differences.

Conventional loans

Conventional loans are funded by Freddie Mac and Fannie Mae and generally require PMI if you’re providing less than 20 percent down payment. However, as you pay back your mortgage, your PMI can be removed.

FHA loans

FHA mortgages are issued by the federal government and come with a one-time fee (called an Upfront Mortgage Insurance Premium, or UFMIP) as well as monthly Mortgage Insurance Premiums (MIPs). As of June 2013, borrowers who opt for FHA mortgages are required to pay their MIP for the entirety of their loan.

USDA loans

Americans living in rural or even some suburban areas may benefit from USDA loans, particularly because they don’t have a down payment or mortgage insurance requirement. However, in place of the mortgage insurance requirement, an upfront guarantee fee and annual fee are required. The former is a one-time fee that’s one percent of the loan amount, while the latter is 0.35 percent of the amount, bundled into your monthly payments for the duration of the loan.

VA loans

Created to help military veterans and their families achieve homeownership, VA loans have a major advantage: no mortgage insurance required.

However, VA loans do require a funding fee. It’s a one-time payment, but it contributes to the VA home loan program to keep it affordable for borrowers.

Other alternatives to paying mortgage insurance exist even for loan programs that would otherwise require it. These vary based on your location and specific situation and can be applied on a case-by-case basis. A local loan officer should be able to suggest solutions available to you.

Piggyback loans

You may be able to keep your mortgage below the mandatory mortgage insurance threshold by using a second mortgage to cover some of your down payment. There are two cases for this, the first being more common:

• Down Payment Assistance (DPA) programs are often issued by state or local governments to make homeownership more affordable for their residents. Assistance can be in the form of a credit at closing, a grant or a second mortgage. These second mortgages can be non-repayable, like a grant, or forgiven after a certain amount of time in the home. If the assistance amount supplements your down payment enough to raise your contribution up to the 20 percent threshold, you may not need to pay mortgage insurance, depending on the program.
• You may be able to use a home equity loan or HELOC to finance your new home. In this method, homebuyers borrow 80% of the home’s value in a first mortgage, provide five or 10 percent down, and finance the rest with a home equity loan or HELOC to eliminate the mortgage insurance requirement. These are commonly known as “piggyback” mortgages.

Lender-paid mortgage insurance

Sometimes your lender will cover your mortgage insurance fees if your mortgage is eligible. Often, they are paid by the lender via a lump sum premium on your behalf at loan closing.

The trade-off is a higher interest rate, which will vary based on your credit score and how much you provide as a down payment. While you can eventually cancel mortgage insurance payments for a Conventional loan, lender-paid mortgage insurance stays until the loan is paid off—meaning you’ll be paying these higher-rate mortgage payments for the duration of the loan.

You can eliminate your mortgage insurance payments on Conventional loans a few ways:

1. Pay your mortgage down to 80 percent of the home purchase price. This way you now possess 20 percent home equity as if you had made a down payment for that amount.
2. If your home value increases, either through renovations or property value changes, that equity increase counts towards your 20 percent share, at which time you can request to remove mortgage insurance through your lender.
3. You may be able to refinance to a new loan balance that is less than 80 percent of the home value.

Mortgage insurance gives lenders the opportunity to offer loan programs with lower down payment requirements, helping you move in faster by reducing large up-front costs in favor of monthly payments.

While mortgage insurance can be avoided in some circumstances, your loan officer can help you choose the option that works best for your budget, which may include a higher down payment, a higher interest rate, a different loan program, a second mortgage or a mortgage insurance payment that offsets other costs. Reach out to a loan officer to make your plan.