Author Topic: Can you put down less than 20% for a home & not have to pay PMI?  (Read 6673 times)

MrsCoolCat

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Can you put down less than 20% for a home & not have to pay PMI?
« on: February 21, 2015, 05:49:07 PM »
My DH is doing most of the research but does anyone know if it's a possibility or just an "urban legend"? Both our credit scores are above 750 or 760 which is a main factor in being able to pay the less than 20% down from what I vaguely hear... I don't even know how much PMI is except that 20% is the magic number to avoid it. Oh and this is for a prospective investment property. Thanks.
« Last Edit: February 21, 2015, 05:53:16 PM by MrsCoolCat »

johnny847

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #1 on: February 21, 2015, 06:30:25 PM »
My veteran friend mentioned that he can put down less than 20% (I don't remember how much exactly, 10%?) if he goes through the VA or something like that.

As for the general population, I'm not quite sure, but my best guess is no.

OneCoolCat

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #2 on: February 21, 2015, 06:35:00 PM »
My DH is doing most of the research but does anyone know if it's a possibility or just an "urban legend"? Both our credit scores are above 750 or 760 which is a main factor in being able to pay the less than 20% down from what I vaguely hear... I don't even know how much PMI is except that 20% is the magic number to avoid it. Oh and this is for a prospective investment property. Thanks.

DH here.

QuickenLoans said we could avoid PMI if we put down 5% because of our credit scores.  I'm concerned they will just nickel and dime us elsewhere to negate the lack of PMI.

Goldielocks

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #3 on: February 21, 2015, 06:38:08 PM »
I believe you can if you take out two loans...  One for the 10-20% you need, and one for the final 80%.

You pay more (higher rate) for the smaller loan, usually. It can be a heloc, second line mortgage, whatever.  Your broker will have a few different scenarios to offer.  Not all will be less than PMI, but ask.

justajane

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #4 on: February 21, 2015, 06:39:33 PM »
We did. In 2007, we put down 10%. Back then it was called a "piggy back loan" or an 80-10-10 (main mortgage, down payment, 2nd mortgage). The 10% loan was with a different bank entirely and was a higher interest rate. It was at 6%, and it would have ballooned at 15 years. We paid it off within 5 years. 

But YMMV with an investment property. And we might have gotten in on the tail end of these types of mortgages. We also have excellent credit. The woman who processed our loan for a refi a few years later said ours was one of the highest combined scores she had ever seen, although I have no idea if that factored in to our ability to get the piggy back originally.

justajane

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #5 on: February 21, 2015, 06:45:18 PM »
I also wanted to say that a two loan scenario will greatly complicate any sort of refinance you might want to do in the future. I don't know if PMI is as much of an obstacle. When interest rates dropped so much around 2009-10, we contacted a few banks that said they couldn't even consider a refinance with the 2nd loan on the house. For us to get the lower rate for a 30 yr mortgage, we had to pay off the 2nd loan. We were planning on doing it anyway, but it's something to consider.

caliq

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #6 on: February 21, 2015, 06:55:16 PM »
My veteran friend mentioned that he can put down less than 20% (I don't remember how much exactly, 10%?) if he goes through the VA or something like that.

As for the general population, I'm not quite sure, but my best guess is no.

VA loans for eligible veterans (you have to have a Certificate of Eligibility, IIRC it's basically any vet who wasn't discharged under dishonorable conditions) have no requirement for PMI -- you can even do 0% down.  Unless you have a VA-rated service connected disability, you do have to pay a funding fee but it gets rolled into the overall loan.  I think it's like 2% of the total loan. 

If you're not an eligible vet, I don't know of any way to avoid PMI. 

lakemom

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #7 on: February 22, 2015, 07:24:41 AM »
Rental property is treated differently than the home you live in.  I've never seen a business loan at less than 30% down.  Have you already been shopping around for a mortgage?  What are lenders telling you?  If you are looking at owner occupied multi family homes than a conventional mortgage is still possible and I would think the PMI issue would be up to each individual lenders policies.

chasesfish

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #8 on: February 22, 2015, 07:35:34 AM »
On an investment property, you have to put 20-25% down for a conventional mortgage.

If its an in-house bank loan, they may do a higher amount, but you'll need to offer up additional collateral (other property, stock portfolio, ect)

La Bibliotecaria Feroz

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #9 on: February 22, 2015, 08:10:08 AM »
We are planning to put down only 5% but were told that the options were monthly PMI or a single premium PMI folded into the mortgage in the form of a higher rate.

iamadummy

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #10 on: February 22, 2015, 08:48:48 AM »
yes, get a second

Goldielocks

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #11 on: February 22, 2015, 08:55:31 AM »
We are planning to put down only 5% but were told that the options were monthly PMI or a single premium PMI folded into the mortgage in the form of a higher rate.

Around here, the second loan for a rental is usually against available equity in another property.  You would need enough equity there to satisfy the lender.  My grandmother also invested in 'private' second mortgages at higher interest rates, so you could look into those finance companies. E.g. lending club type companies.

forummm

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #12 on: February 22, 2015, 11:46:32 AM »
A lot has changed in the mortgage industry since 2008. FHA loans have really expensive PMI that you can't get rid of quickly even if you pay down the LTV <80%. I don't know if piggyback loans (80% first mortgage, 15% second mortgage) are still allowed, but I think this is what you're looking for.

chasesfish

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #13 on: February 22, 2015, 12:43:57 PM »
Bank of America advertises a mortgage product with 0% down, interest-only payments, and no private mortgage insurance:

http://www.merrillhomeloans.com/mlhl/pages/100-percent-financing.aspx

I haven't personally used it, but it looks pretty good. As chasesfish suggested, they require you to post collateral equal to 39% of the value of the home in the form of "eligible diverse securities". Most people here invest with index funds, and I would imagine that they count as eligible diverse securities.

What "interest-only" means is that at the end of the term of the mortgage, you still owe the entire principal. This is what you want if you plan to invest rather than prepay your mortgage.

Yep - Real Estate Financing 101.    80% LTV on the House, 50% on a securities portfolio.  That product is probably still only for owner occupied property.

LLCoolDave

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #14 on: February 22, 2015, 02:56:38 PM »
Just my 2cents, if you can't afford to put 20% down then you shouldn't be buying rental real estate. Also I am pretty sure 80/20 loans have gone the way of the dinosaur. Investors used them to purchase property with no money down and flip them which did contribute to the 2009 financial collapse.

Do you have a separate emergency fund for the rental? There are a lot of things that can go wrong with rentals especially if it is an older property. A single furnace or A/C unit can cost $5k.

Are you planning to carry the note to the full 30 year term? Would you pay it down early if you could? I would never want a noose around my neck for that long.

Just my thoughts. Best of luck.

OneCoolCat

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #15 on: February 22, 2015, 05:06:45 PM »
Just my 2cents, if you can't afford to put 20% down then you shouldn't be buying rental real estate. Also I am pretty sure 80/20 loans have gone the way of the dinosaur. Investors used them to purchase property with no money down and flip them which did contribute to the 2009 financial collapse.

Do you have a separate emergency fund for the rental? There are a lot of things that can go wrong with rentals especially if it is an older property. A single furnace or A/C unit can cost $5k.

Are you planning to carry the note to the full 30 year term? Would you pay it down early if you could? I would never want a noose around my neck for that long.

Just my thoughts. Best of luck.

How much do you think we should have saved up before purchasing a rental property?  We have 20k now and save about 1700 a month between the both of us (after our 3k 401k contributions).  The house we are looking at is for sale for 100k and was built in 1992 and appears to be rent ready with no repairs needed (preliminary opinion).  QL said they would give us a conventional loan up to 300k at 4.1-4.6% (because its an investment property) and we would avoid pmi with 20% down.

LLCoolDave

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #16 on: February 22, 2015, 06:55:35 PM »
Ok, this could turn into a couple of tangents about real estate. Sorry.

A few years ago I thought real estate was going to be my path to FI and I researched it quite a bit. I don't think that anymore. I'm very comfortable with a reasonable AA without the hassle of dealing with renters. I just want you to take a look in the mirror and decide if real estate is right for you.

So here are some questions you need to ask yourself; what market are you in? What is your ROI? Do you realize that leverage really means risk (in financial terms)? Is it in a good neighborhood? Will that neighborhood be good in 30 years? Do your state laws favor renters or owners? Are you willing to contact a lawyer to force out a renter? What if damages exceed the deposit? These are just a few. Based on your original post I assume this is your first rental property.

I wouldn't invest in a rental property unless my net worth was above $500k and I needed diversification. Some may disagree. Take a look at REITS, they returned 30% last year with out the hassle of dealing with a renter. Some might argue they are over valued because of the tremendous growth but they should be part of your AA.

Understand what PMI means; this is a type of insurance based on an assumption that when a buyer takes out a loan the purchase price won't go down more than 20% and the bank can recoup their losses. You lose the house and your down payment but the bank won't suffer any losses. Because of the 2009 crisis, PMI has gone up significantly to cover those loses.

The bank is not your friend. The first year I paid my mortgage I paid $8k in interest and $3k in principle. You are paying for the privilege. Any business that is highly leveraged will benefit the bank rather than the business.

Lastly, I recommend a book that I read when investigating real estate. A lot of good info but I don't agree with everything therein.

http://www.amazon.com/Buy-Rent-Profit-Landlord-Estate/dp/1416589848/ref=sr_1_7?ie=UTF8&qid=1424653192&sr=8-7&keywords=real+estate

It goes into the practicalities/legalities of investing, and owning rental real estate.
« Last Edit: February 22, 2015, 07:10:44 PM by LLCoolDave »

MrsCoolCat

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #17 on: February 22, 2015, 07:37:25 PM »
Yeah, DH already started another thread so hopefully most of you have convinced him to wait. I'm more gearing towards waiting, too, but it really is a matter of maybe waiting a month to see how certain situations unfold... Then again might have to worry about kids soon, too... We'll see but I was more against it than him. Then again it was his idea. We'll have to research, discuss again and regroup soon. Thanks everyone.

neo von retorch

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #18 on: February 23, 2015, 09:46:48 AM »
In 2007 I put 5% down, and went through a broker. She showed me an additional line item that was around $500 that got me a loan that didn't have PMI. My rate 6.375%. Of course, rates dropped quickly in the years after, and I refinanced to my credit union at 5% / 15 years and I did have PMI, but it was only $20/month. Within a couple years, I got it paid down to the point that they dropped the PMI. (And I refinanced again with the continually dropping rates and am now on 3.375% / 15 years with no PMI.)

Gone Fishing

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #19 on: February 23, 2015, 12:57:43 PM »
Just my 2cents, if you can't afford to put 20% down then you shouldn't be buying rental real estate.

I'm leaning this way as well.

When you borrow to purchase an investment, you are leveraging your equity (your down payment in this case), which can be great for returns, but gets ugly quick when things go bad. 

Here is a little example:

Good times:

$100k House bought with 90/10

You rent it out, net a $2000 profit for the year after expenses.

Awsome! You just made a 20% return on your investment vs someone who paid cash for the house would have only gotten a 2% return

Bad Times

Your rental sits vacant for 4 months after a tenant trashes it and you need to make repairs and re-market the property.

You show a $2000 loss or a 20% loss vs the guy who paid cash who only had a 2% loss. 

The worst part is that you had to come up with the cash for the repairs and the loan payment vs the guy who paid cash only has to pay for the repairs.

To play the leverage game with rentals, you need to have an emergency fund that also covers the added debt payments, vacancy risk, maintainance risk, etc. because the last thing you want is to have to dip into your 401(k) to make a payment. Sure, putting 20% will reduce your returns a little, but it also makes that payment a little easier to handle when the property is vacant.   

michaelanthony

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Re: Can you put down less than 20% for a home & not have to pay PMI?
« Reply #20 on: February 23, 2015, 01:57:05 PM »
Bank of America advertises a mortgage product with 0% down, interest-only payments, and no private mortgage insurance:

http://www.merrillhomeloans.com/mlhl/pages/100-percent-financing.aspx

I haven't personally used it, but it looks pretty good. As chasesfish suggested, they require you to post collateral equal to 39% of the value of the home in the form of "eligible diverse securities". Most people here invest with index funds, and I would imagine that they count as eligible diverse securities.

What "interest-only" means is that at the end of the term of the mortgage, you still owe the entire principal. This is what you want if you plan to invest rather than prepay your mortgage.

Thanks for that link, very interesting -- had never heard of that option before. If you have the cash (39% of the home price) to use as a collateral, it sounds like a pretty good deal. You get to keep your money in stocks, instead of liquidating, presumably growing at a decent clip, while only making the interest payments.

And if I'm understanding you correctly, you only owe the principal at the end of the mortgage? Would this work with a traditional 30-year mortgage? And how is the principal paid off, in one giant lump sum?