If you don’t put 20% down on a home, you’ll pay mortgage insurance in some form. If it’s a conventional loan, you pay PMI. If you opt for a government-backed loan, like the FHA or USDA loan, you pay annual insurance for the life of the loan. There’s no getting around it, unless you try one of the below strategies.
The piggyback loan solves the issue of not having a large down payment. Essentially, you borrow the down payment in the form of a second loan, called a home equity loan. You can take it out as a 2nd mortgage or as a home equity line of credit. What you get depends on your credit score, debt ratio, and other qualifying factors.
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You close your first loan, such as a Fannie Mae conventional loan and the second loan simultaneously. The funds from the second loan pay the down payment for the first loan. You then walk away with two mortgage payments to pay each month.
The most common piggyback loan situation is the 80/10/10. You borrow 80% of the home’s purchase price with your first mortgage. You borrow another 10% from the second mortgage program, and the remaining 10% comes from your own funds or gift funds, if applicable.
Because you don’t borrow more than 80% for the first mortgage, you avoid the mortgage insurance scenario altogether. Even though you have the trouble of making two mortgage payments each month, you get the benefit of more interest to write off on your taxes. You cannot deduct fees paid for any type of insurance, but interest paid on either loan may be tax deductible, helping to lower your liabilities overall.
Accept Gift Funds
Many programs, including the conventional loan, allow the use of gift funds. If you have a relative, employer, or close friend willing to lend you the money necessary to make a 20% down payment, you can avoid mortgage insurance.
Before you accept any gift funds, though, you must go about the process the right way. You cannot just take the funds and say they are a gift. The donor must provide you with a Gift Letter. The letter must state the purpose of the funds and that they are a gift, not a loan. The letter should include the date and the property address of the home you plan to purchase. You can then accept the funds, deposit them in the appropriate account and provide the lender with the deposit ticket.
The lender may ask for proof of where the funds originated if there is concern of it being a loan. The best thing the donor can do is keep the proof of where the funds came from and the withdrawal receipt to show the lender the funds are their own and that they are a gift.
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The main issue with any type of gift funds is adding to your liability. If the funds are expected to be repaid, it alters your debt ratio, which could affect your loan approval. Proving the funds are not a loan is the only way to prevent this situation.
Many borrowers are afraid to consider subprime loans. They seem to still carry around that bad reputation because of their role in the housing crisis. Today, subprime loans are a completely different animal. They are straightforward and require as much verification as conventional and government-backed loans.
The benefit of opting for a loan provided by a bank that keeps the loans on their books is they can make their own rules. They don’t have to require a 20% down payment. They may allow a down payment as low as 5% and still not require mortgage insurance. Of course, this type of situation is usually reserved for borrowers that have excellent credit and/or a low debt ratio, though.
It all comes down to your risk level as that is what mortgage insurance is all about. Subprime lenders can make their own rules, though, based on their ability to accept risk.
Try a Credit Union
If you belong to any type of credit union or have the ability to do so, you may want to try getting a loan from them. Credit unions, like subprime lenders, can make their own rules. This often means a lack of mortgage insurance requirements.
Check around in your area for a credit union that you may be able to joint. It’s not just for people at certain companies or occupations anymore. There are credit unions for certain communities and even for family members of those working for a specific company. Exhaust all of your options to see if this may be a viable choice for you.
Opt for Lender Paid Mortgage Insurance
The last choice is to accept the mortgage insurance, but let the lender pay for it. The lender offsets this cost by increasing your interest rate. The amount they increase your rate depends on the amount they must pay for you. They use the higher interest charges to offset the cost they paid for your insurance. However, they pay the entire amount of your insurance upfront, rather than paying it monthly. This is only a viable choice when you plan to stay in the home as long as possible. If you will move in a few years, you’ll pay more interest, yet only because you paid the entire insurance premium up front.
The benefit of this option is the tax write-off you may get for the interest on the loan. Again, you cannot write off mortgage insurance, but interest is a tax deduction. As long as you don’t exceed the allowed amounts, you may be able to lower your tax liability; therefore, lowering the cost of opting out of mortgage insurance.
There are ways to get out of paying mortgage insurance even if you don’t have 20% to put down on a home. Shopping around and finding the option that works best for you will help you make the right choice. What works for you might not work for someone else, so make sure you research the options as they pertain to your situation to make the most of it.
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