How to Avoid Mortgage PMI

Avoid PMI payments.

Fannie Mae and Freddie Mac (the two largest government backed servicers in America) mortgage loans require PMI (Private Mortgage Insurance) when the loan amount of the first mortgage exceeds 80 percent LTV (Loan-to-Value, or percentage of loan to the value of the home). PMI is not available on government loans such as FHA and VA, as they require their own versions of mortgage insurance. If you cannot avoid PMI, one consolation is PMI may be tax deductable as of 2007.

Things You'll Need

• 20 percent equity or down payment

Instructions

Avoid PMI on Your Mortgage

1. Calculate how much down payment is affordable. Do not use all of your saved funds for the down payment; you may want money for paint, curtains, carpet or emergencies. Not all of the 20 percent down payment needs to be from money you saved. If you have less than the full 20 percent required, there are other options to explore.

2. Ask relatives for a gift. Regulations allow relatives to gift money for closing costs and down payment. If the LTV is 80
   percent or less, the entire down payment can be a gift. If the LTV is more than 80 percent at least 5 percent of the funds must be your own funds, but the rest may be from the gift.

3. Apply for a second mortgage. If the gift isn't available or isn't enough, obtain a second mortgage on the property. The lender approving the first mortgage will need to know about and approve the terms of the second, but this commonly is accepted.

4. Apply for a portfolio loan from a bank. Many of the larger banks have programs available only at their bank branches. These loans are not sold to Fannie Mae or Freddie Mac and do not have to meet their guidelines. Call the banks in your area and see if any have a loan for your situation.

5. Save more money. If you still do not have the 20 percent down payment wait until you do. Dedicate yourself to save more for a down payment; maybe this means a second job. If you live in an area of declining home values this could work in your favor. Not only would you not have PMI, but also you could pay less for the house overall.

6. Request the lender remove the PMI. The Homeowners Protection Act of 1998 requires lenders remove PMI once the home owner documents the LTV is 80 percent or less. If the loan is at 80.01 or more, it will remain. You may have to provide an appraisal, or the valuation from the county used to calculate taxes to your lender.

Tips & Warnings

• Single-payment mortgage insurance is another option to avoid monthly PMI payments. This PMI option asses a single payment amount that is due at the close of the loan. If buying a home, ask the sellers if they will pay this for you. While the loan would have the coverage PMI provides, the homeowner would not have the monthly obligation for it.

• FHA requires both upfront MI, and monthly MI. FHA MI cannot be removed without refinancing out of the FHA loan into another loan product. VA loans require a funding fee, which varies according to your veteran status and how often you have used the benefit before. While this technically isn't mortgage insurance, it takes the place of it.

References

• Federal Reserve: Looking for the Best Mortgage
• National Credit Union Administration: Homeowners Protection Act Memo