Big Down Payments Are Not Always Necessary
There are many widespread myths about mortgage down payments. One of the most common misconceptions is that borrowers are required to make a down payment of 20% or more, to be eligible for a mortgage loan.
A recent study done by the National Association of Realtors recorded that 35% of homebuyers believed they had to put down 20% when purchasing a home. Another 19% were unsure how much they were required to put down.
The truth is several mortgage loans allow borrowers to put down less than 20% – and sometimes without mortgage insurance.
Higher Loan-to-Value (LTV) Ratio
Private mortgage insurance (PMI) is a method of protecting mortgage lenders from financial losses in case a borrower defaults on their loans. In general, a PMI policy is necessary in cases where the loan-to-value ratio is above 80%.
For example, if a borrower makes a 5% down payment and borrows 95%, PMI will most likely be required.
Financing Options for Less Than 20% Down Without PMI
One way to avoid private mortgage insurance is called the 80/10/10 mortgage strategy. This is when the borrower uses two loans to fund the purchase of a home. The first and second mortgage cover 80% and 10% of the purchase price while the borrower pays the remaining 10% as a down payment.
As we mentioned above, PMI is typically required when the LTV ratio exceeds 80%. However, in the 80/10/10 scenario, the LTV on both loans remains at or below 80%. That’s why this strategy works for putting down less than 20% and avoiding PMI.
Another way to accomplish this is lender-paid mortgage insurance. In this strategy, the borrower takes a slightly higher rate while the lender pays the private mortgage insurance upfront.
VA loans should also be included in this discussion as they allow military personnel to avoid private mortgage insurance. The most significant benefit is that the VA loan program offers 100% financing, removing the need for a down payment.
Talk to a Professional
While we have outlined seemingly simple strategies to put down less than 20% and avoid private mortgage insurance, many factors impact your financing. Be sure to talk to a knowledgeable mortgage analyst like those at JVM before making any decisions about a mortgage.
