Buying A House: Down Payments and Private Mortgage Insurance

July 11, 2009

Buying a house can be confusing if you don’t have someone you trust explaining the process to you. Fortunately for my wife and I, my my mother-in-law is a real estate agent and my dad is a real estate broker, so we haven’t had to play the guessing game with our first two property purchases.

Mortgage lenders and real estate agents sometimes try to push different programs on buyers that may not be in your best interest. So let’s take a look at your down payment and how it effects private mortgage insurance.

Private Mortgage Insurance

This is an insurance policy that the mortgage company will force you to pay on a monthly or yearly basis that covers them in the event that you don’t pay back the loan. All mortgage companies will require you to pay this if you don’t start out with at least 20% equity in the home.

That means you either need to contribute either 20% or more for a down payment, or the combination of your down payment and equity from a higher appraisal value than the purchase price equals 20% or more. The premium typically runs about $100 a month for a $200,000 to $300,000 house.

You basically have three choices when it comes your down payment for a real estate purchase if you plan on getting a partial loan for the property:

20% down or more: You’ll be eligible to apply for a conventional loan from lenders such as Bank of America, Citi Group, and Wells Fargo with prime interest rates. You’ll also avoid paying private mortgage insurance. This is the most ideal down payment to make, if you are able to save up a 20% or more down payment.

10% to 20%: You won’t avoid PMI, but you’ll still qualify to apply for a conventional loan through traditional lenders and credit unions.

10% or less: You’ll pay private mortgage insurance, and you’ll have to apply for loans through wholesale lenders and programs such as an FHA loan that is backed by the federal government and allows as little as a 4% down payment if you have a good, clean credit history.

You can still get a prime interest rate with little money down if you have good, stable income and clean credit. The only problem is that these loans are harder to qualify for nowadays. The sub-prime mortgage meltdown has put many wholesale lenders out of business, and the ones that are doing well have drastically tightened up their underwriting guidelines.

This post is part of our home buyer series.  We started off by looking at mortgage pre-approvals and next we’ll take a look at a few different types of loans.

Erik

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Erik
Erik Folgate is a husband and father living in Orlando who's been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.

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5 Responses to Buying A House: Down Payments and Private Mortgage Insurance

  • Vanessa Trinh

    I have a PMI on my FHA home loan that I took out in 2/19/2010. In the event that my income is cut from my employer and I’d no longer can afford the mortgage payment. What would be the consequence if I were to walk away from this home, I mean if I just move out of the house?

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