If you’re looking for a new home, you’ve probably heard of PMI or Private Mortgage Insurance.
PMI is a type of insurance required when you take out a home loan with a down payment of less than 20%. This insurance protects the lender if you default on your loan, but it can add a significant amount to your monthly mortgage payments and is a total buzzkill.
When it comes to FHA loans, PMI can be a necessary evil. The Federal Housing Administration (FHA) insures FHA loans such as 203k loans, which means that if you default on your loan, the FHA will pay the lender a portion of their loss. In exchange, lenders must charge PMI on FHA loans with a down payment of less than 20%.
Stay with me here because I will show you how to avoid getting a PMI with an FHA loan.
How to Avoid PMI on FHA Loan
If you want to avoid PMI on your FHA loan, there are a few steps you can take:
- Put down at least 20% of the purchase price as a down payment. If you can put down 20% or more when you take out your FHA loan, you will not be required to pay PMI. This is because the lender will have a smaller amount at risk and will not require insurance to protect their investment.
- Ask the lender to remove PMI when your loan-to-value ratio reaches 78%. Under FHA guidelines, the lender is required to cancel PMI when your loan-to-value ratio reaches 78% automatically. If you make regular, on-time mortgage payments, your loan-to-value ratio will eventually reach 78%, and you can ask the lender to remove PMI.
- Refinance your FHA loan. If you have been making regular, on-time mortgage payments for several years, you can refinance your FHA loan and remove PMI. This is because your loan-to-value ratio will have improved, and the lender will no longer require PMI to protect their investment.
How to Not Pay PMI on FHA Loan
Paying for PMI on an FHA loan can be a bit of a drag because it just means that you will have to pay more to those greedy banks. Here are a few ways that you can avoid having to pay PMI:
- First, you need to find out how much of an FHA loan you qualify for then, from there, you can find out how much of a down payment is needed.
- You can make a down payment of at least 20% of the home’s purchase price. So, if your dream home costs $180,000, you’ll need to come up with at least $36,000 to avoid PMI. Easy peasy!
- If your home has appreciated and your LTV is below 80%, you might be able to cancel PMI, but beware that the bank will probably require a professional appraisal, and that’s on you, buddy.
- Another option is a piggyback mortgage, where you take out a second mortgage or home equity loan simultaneously with the first. This can lower your LTV below 80%, eliminating the need for PMI.
There you have it. PMI doesn’t have to be a pain in the butt if you know your options.
How to Avoid Paying PMI on FHA Loan
How To Get an FHA Loan with No PMI
If you want to get an FHA loan with no PMI, there are a few options you can consider:
- Apply for an FHA loan with a two-stage mortgage insurance premium. Based on the FHA loan requirements, some FHA loans come with a two-stage mortgage insurance premium, which means that you will pay a lower premium for the first few years of your loan and then a higher premium for the remainder of the loan. This can be a good option if you plan to sell or refinance your home within a few years, as it will save you money on your monthly mortgage payments in the short term.
- Look for lenders that offer lender-paid mortgage insurance (LPMI). LPMI is a type of mortgage insurance that is paid for by the lender instead of the borrower. This means that you can get an FHA loan with no PMI, but the trade-off is that your interest rate will be higher.
- Consider a VA loan. Suppose you are a veteran or active-duty military member. In that case, you may be eligible for a VA loan, a mortgage loan guaranteed by the Department of Veterans Affairs (VA). VA loans do not require PMI, meaning you can get a home loan with no PMI and a potentially lower interest rate.
11 Tips on How to Save Up for a Down Payment
To avoid having to pay for PMI, assuming that you meet the FHA credit requirements, here are 11 tips to help you save for that down payment which you can start today:
- Make like a squirrel and start hoarding those nuts (aka your money) for a rainy day (aka a down payment on a house).
- Set a goal, plan it, then crush it like a boss. Savings goals don’t stand a chance against your determination. When you write down your goals, you’re already halfway to achieving them!
- Stop buying avocado toast and lattes every day. Your future self will thank you when you’re lounging in your new home instead of sitting in a coffee shop. Ask yourself, do you really need a Disney plus subscription?
- Get a side hustle and start bringing in that extra dough. The more money you make, the faster you’ll reach your down payment goal. The average part-time Uber driver makes on average $31,302 per year. That would pay for your down payment.
- Cut out unnecessary expenses and start living a more frugal lifestyle. Your bank account will thank you. These expenses are things like cigarettes, alcohol, eating out, cannabis, Starbucks, streaming subscriptions, that gym membership that you don’t use,
- Put your savings on autopilot by setting up automatic transfers from your checking to your savings account. You can also set it up so that for every transaction you do through your bank card, and it would round up the amount to the next dollar and put the difference into your savings account.
- Start using cash instead of credit cards. Not only will this help you stick to a budget, but you’ll also be less likely to overspend. Stop giving your hard-earned money to those greedy credit card companies. Cash is king for a reason.
- Negotiate a raise or start looking for a higher-paying job. You deserve to be paid what you’re worth, and every extra dollar will help you reach your down payment goal faster.
- Consider taking on a roommate or renting a room in your home to bring in some extra income. Even though having a roommate can be a total pain in the butt, it would be a short-term pain for long-term gain.
- Don’t be afraid to ask for help. Whether from family members or a financial planner, getting outside advice can be invaluable in reaching your savings goals.
- Consider getting a mortgage down payment assistance loan. These loans can help cover your FHA home loan’s down payment and closing costs. You would need to qualify just like any other loan.
Additionally, if you’re interested in options that might eliminate the need for a large down payment altogether, learn more about FHA loans without down payments.
Final Thoughts
PMI can be a major buzzkill when buying a new home.
But with an FHA loan, you can avoid PMI and save money on your monthly mortgage payments. By making a down payment of at least 20% or asking the lender to remove PMI when your loan-to-value ratio reaches 78%, you can avoid PMI and still get the benefits of an FHA loan.
Have questions? Find the closest location near you and reach out! We’d be glad to help.
Frequently Asked Questions
What’s PMI, and why do I gotta pay for it?
PMI, or private mortgage insurance, is that annoying extra insurance you gotta pay for when you take out a home loan with a down payment of less than 20%. It’s supposed to protect the lender if you default on your loan. Not ideal, but that’s how it works.
How can I avoid PMI on my FHA loan?
Easy, make a down payment of at least 20% of the home’s purchase price, and avoid PMI altogether. Or you can ask the lender to remove PMI when your loan-to-value ratio reaches 78%.
Can I get rid of PMI on my FHA loan if I’ve made regular, on-time payments?
Sure thing! If you’ve been making regular, on-time payments for a while now, you can refinance your FHA loan and remove PMI. This is because your loan-to-value ratio will have improved, and the lender won’t need PMI to protect their investment anymore.
Is lender-paid mortgage insurance (LMPI) a good option to avoid PMI on my FHA loan?
LMPI can be a good option to avoid PMI, but it often comes with a higher interest rate. Make sure to weigh the pros and cons before deciding if it’s right for you.
Are there any other options for avoiding PMI on my FHA loan?
For sure, you can! Another option is to take out a second mortgage or home equity loan simultaneously with the first. This can lower your loan-to-value ratio.
