The answer is Yes, you can pay off all PMI once at closing day with a Conventional loan purchase with as little as 5% down payment of the purchase price. First let me explain a bit about what PMI or Private Mortgage Insurance is and why it is needed. It was decided by the Federal regulators who make these rules and the banks or lenders that anyone purchasing a home with less than a 20% down payment on a Conventional loan ( one guaranteed by either Federal agency called Fannie Mae or Freddie Mac ) represented a higher risk than those who did have a 20% down payment. The risk being not having enough “skin in the game” should values drop and the home owner finds the home is mortgaged more than it is worth as happened in recent years across the country. When a buyer is purchasing a home with as little as 5% down there is insurance available to be purchased which would protect the lenders or bank’s investment should the borrower ever default on the mortgage. The cost of buying this type of insurance is charged to the borrower in exchange for the lender or bank making a larger & riskier loan, up to 95% of the purchase price.
Now most buyers just agree and arrange to pay the cost of the mortgage insurance (PMI) as an additional fee added onto to each monthly payment. This approach is not the only way to pay the PMI however. It can be paid entirely in ONE single sum of money on the day the buyer closes on the home purchase. That’s it, no more payments of PMI ever again even if the buyer keeps the same mortgage open for 30 years before paying it off. This is called Single Premium PMI. The cost of it is based on two factors primarily, the buyers credit score and the amount of down payment in increments of five percent . Meaning the lower the credit score and the lower the down payment, the higher the cost of the Single Premium PMI.
Here’s an example of a buyer purchasing a condominium with a 7% down payment. Meaning the conventional mortgage will be for 93% of the purchase price. The buyer has a credit score of 725. In this case a check of the various PMI vendors found the cost of the Single Premium PMI, to be ALL PAID up front, ranged from 2.38% to 2.48% of the loan amount. If the mortgage was to be for $400,000 the cost would be from $9520.00 to $9920.00. But the buyer would be saving over $200.00 monthly by paying the PMI off in this manner instead of paying PMI over $200.00 a month for possibly many years.
Even better would be to have this cost paid for by the Seller by asking for a closing cost credit back of up to 3% of the sale price from the Seller or by asking the lender to pay this PMI cost by raising the interest rate on the mortgage in exchange.
The net of this is that it is possible to buy with a 5% down payment using a conventional loan and NOT have any PMI to pay each month.
I hope this post has been helpful and encouraging to those that may have thought a Renovation project was too complex or beyond their ability to manage. My intent is always to inform, educate, and generate discussion. Please call me or email me directly or visit my website for more information on renovation loans. I welcome your comments and questions!