How to Put Down Less Than 20% to Buy a Home and Avoid PMI

Editors' pick: Originally published May 24.

There's a myth that you can only buy a home if you have a 20% downpayment at your disposal. But according to the National Association of Realtors, for those who financed their homes, the average downpayment was actually just 10% and for first-time homebuyers, it was even lower at 6%.

The 20% downpayment myth didn't just come from thin air. Many people have that benchmark in mind, because if you do put down less than 20% to buy a home, you may be subject to increased monthly costs, in the form of potentially higher interest rates and private mortgage insurance, or PMI.

PMI protects the lender in case the borrower isn't able to make the mortgage payments and is typically required for conventional mortgages - loans with balances of $417,000 or less for the majority of the country and $625,000 or less for higher-priced areas.

This protection comes at a high ongoing cost, though. For a $400,000 home where you put down 10% ($40,000), PMI is estimated to be $117 a month. That's in addition to your mortgage, homeowners insurance and homeowners association fees. Luckily, PMI doesn't stick around for the life of your loan - just until your loan-to-value ("LTV") decreases to 78% to 80% (i.e. you can request to have it removed once your LTV decreases to 80% and if not requested, the mortgage servicer is required to remove it when your LTV decreases to 78%).

The good news is there are some ways to make a downpayment of less than 20% without having to pay PMI -- here's how.

Traditional Lenders

In February, Bank of America introduced a new mortgage program, the Affordable Loan Solution Mortgage, which allows eligible borrowers to put down as little as 3% without requiring PMI. The program, a partnership between Bank of America, Freddie Mac, and non-profit Self-Help Ventures Fund, is targeted towards low- and moderate-income borrowers. To qualify, borrowers can't make more than the HUD area median income and must have a credit score of 660 or higher.

As an example, for 2016, New York City-based borrowers with a household of one would need an income below $65,200 to qualify for the program. The median income threshold could rule out a lot of potential borrowers. Even still, Bank of America expects to originate $500 million of loans under the program this year.

New Players

SoFi, an online lender initially focused on offering a student loan refinancing product, now originates mortgages in 25 states and Washington D.C. SoFi's mortgages allow borrowers to put down as little as 10% without requiring PMI.

In addition, while traditional lenders may have firm debt-to-income limits (generally up to 45%), SoFi has more fluid debt-to-income limits, which may allow borrowers to ultimately qualify for more financing, up to a maximum of $3 million.

Similar to other online financial companies that are able to offer more interest rate benefits or decrease costs for borrowers because of a lower cost structure, SoFi doesn't charge any application, origination or other lender fees, which could amount to between $500 and 1,500 savings compared to other lenders.

Credit Unions

Another lender that could allow you to put down less than a 20% downpayment without paying PMI is a credit union. Unlike other financial companies that are for-profit entities, credit unions are not-for-profit organizations owned and operated by its members.

Because of this structure, credit unions may be able to provide its members with higher yielding checking and savings accounts, lower rates on its loan products and more flexible loan terms.

For example, the Navy Federal Credit Union allows homebuyers to put down as little as 0% without requiring PMI for mortgages up to $2 million. Similarly, the NASA Federal Credit Union also offers 0% downpayment loans with no PMI required for up to a $650,000 loan amount.

Although your parents might have told you that not everyone gets to be an astronaut as a grown up, luckily you don't have to be one to join the NASA Federal Credit Union. As an alternative to being a NASA employee, you could be a member of one of 900 NASA Federal Credit Union partner companies or associations.

Each credit union has its own membership criteria, so be sure to check the requirements to see what credit unions you're eligible to join.

Buy, Buy, Buy?

It's refreshing to know there are several ways to put down less than 20% for a home purchase without being required to pay costly PMI. 

But just because you aren't paying for PMI outright doesn't mean you're getting a free lunch - those fees could be baked into your loan in other ways. Shally Venugopal, CEO of Myolo, says that "loans with less than 20% down and no PMI may have higher interest rates. When comparing your loan options, be sure to compare APRs, and factor in how long you'll be in the home and how quickly you'll be able to pay down principal."  

In the end, buying a home may be one of the biggest purchases you'll make. As with other major financial decisions, it is best to consider all of the financial and non-financial factors to determine whether buying a home makes sense for you.

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