Lindsey Johnson is the president and executive director
of the U. S. Mortgage Insurers, a trade association that
represents the private mortgage insurance industry.
Reach her at firstname.lastname@example.org.
Cure the Downpayment Blues
Private mortgage insurance can open the door to affordable financing
By Lindsey Johnson
As a mortgage originator, you likely hear this often from potential homeowners: “I want to buy a home, but how can I possi- bly come up with a 20 percent downpayment?” Data show that many people buy homes with a
much lower downpayment, however.
In fact, 80 percent of first-time buyers fall into this
low-downpayment category. Although there are different types of low-downpayment options that make
this possible, a conventional loan with private mortgage insurance (PMI) has proven for 60 years to be a
steadfast and smart way to bring homebuyers to the
Mortgage insurance (MI) protects lenders from defaults, providing creditworthy borrowers access to
mortgage credit despite a low downpayment. This is
a tool that can help originators expand the canvass of
Qualifying for a low-downpayment mortgage
can provide a homebuyer with greater purchasing
power. MI helps individuals get into homes and build
equity sooner. In addition, borrowers who don’t put
all their money toward a downpayment have additional money for home improvements, savings and
other life expenses.
People who sit on the sidelines and don’t take advantage of low-downpayment programs that use MI will
spend more money on rent, delay the potential of
home-price appreciation, forego the tax advantages
of deducting mortgage interest, and could miss out
on historically low mortgage rates.
High rents and low interest rates should be enough
to convert more people into potential homebuyers,
but low-downpayment options can add that extra selling point that tips the balance — if they know these
options exist. The fact is, however, many would-be
first-time buyers are unaware of these opportunities.
A recent Wells Fargo survey of some 3,400 adults
showed that 40 percent of respondents did not know
they can qualify for a mortgage without a 20 percent
downpayment. In short, a 20 percent downpayment
should not be a barrier to homeownership.
Two of the most common low-downpayment loan
options are conventional loans with PMI and loans
guaranteed by the Federal Housing Administration
(FHA). A conventional loan with PMI can be more attractive because it requires a borrower to put as little
as 3 percent down, while the FHA requires 3. 5 percent.
That may seem like a negligible difference, but it is an
additional $1,000 on a $200,000 purchase that can be
extra purchasing power or applied to closing costs or
Some have called MI an added expense, but they
forget that mortgage insurance is the reason these
homeowners qualified for a mortgage in the first
place. Without a larger downpayment, it is more difficult to obtain safe, affordable financing. What makes
PMI even more attractive is that its premiums are
temporary. This is a major benefit that PMI has over
FHA mortgage insurance: private mortgage insurance
can be canceled.
PMI terminates automatically after a homeowner
reaches 22 percent equity in his or her home. It also can
be canceled upon request by homeowners when they
reach 20 percent equity. And when PMI is canceled, the
homeowner’s monthly mortgage payment naturally
goes down because the monthly insurance payment
goes away. Homeowners potentially can save many
thousands of dollars over the life of their mortgage.
There are not many other low-downpayment mortgage options that offer this kind of upside. In contrast
to PMI, mortgage insurance premiums on FHA loans
generally cannot be canceled and are paid throughout
the life of the loan.
Borrowers have some options when it comes to the
type of MI premiums they choose. The most common
is called borrower-paid MI, which is paid monthly
along with the standard mortgage principal and interest (P&I) payment. This is the MI that can be canceled,
because it is paid each month as a separate line item
versus being financed into the mortgage. Even so,
borrowers may opt to pay their full insurance premium
at closing, but this does require more cash in-hand.
FHA mortgage insurance premiums, on the other
hand, are generally known as split-premiums. This
is because one portion of the FHA insurance is paid
“upfront” at closing or typically financed into the
mortgage. Currently this up-front premium is
1.75 percent of the total loan amount. The rest, called
the “annual premium,” is paid in monthly installments
similar to conventional PMI, except that most FHA
annual premiums can never be canceled short of
paying off the loan or refinancing it.
What’s more, a conventional loan with PMI can translate into added purchasing power. With downpayments
as low as 3 percent, homeowners can have more capital
to work with as they search for home that is big enough
to start a family or has a more desirable location. By giving homebuyers more choices in a safe and responsible
way, PMI creates more possibilities for people.
The cash freed up by low-downpayment options created by PMI also can be used to increase the value of a
home. The funds saved by taking out a mortgage backed
by PMI can be used toward home improvements, like
expanding a kitchen or building an addition. These investments into the home can then result in home-price
appreciation. There also are buyers who simply do not
want to enter homeownership “cash poor” and sleep
better knowing they have a rainy-day fund or money
that can be used to cover other expenses.
Tested and reliable
The homebuying process can be exciting but unsettling. Thankfully real estate professionals — including
mortgage originators — serve a unique and essential role in educating homebuyers and dispelling the
myths about downpayment requirements, such as the
misconception that a homebuyer must put 20 percent
down to qualify for a mortgage.
Since 1957, private mortgage insurance has served
as a reliable and affordable way of expanding homeownership by helping millions of families get into
homes. This tried and true low-downpayment option
will continue to help millions more in the future. n
protects lenders from
to mortgage credit
despite a low