For many Americans, the biggest hurdle in buying a home is the 20 percent down payment they think is required for mortgage approval. According to a recent survey by the National Association of Realtors, 34 percent of respondents believe they need more than 20 percent.
Meanwhile, low down payment mortgages account for a significant amount of home buying annually.
Families with down payments as low as 3 or 5 percent have been able to purchase a home thanks to private mortgage insurance (MI) for 60 years. Since 1957, MI has helped 25 million families become homeowners. In the past year alone, MI helped more than 795,000 homeowners purchase or refinance a mortgage. Nearly half were first time homebuyers and more than 40 percent had incomes below $75,000.
How MI works
Mortgage insurance is simple. In addition to the other parts of mortgage underwriting process — such as verifying employment and determining the borrower’s ability to afford the monthly payment — lenders traditionally required 20 percent down to ensure the borrower had some of their own money committed before the bank would provide a loan. This is where MI enters, bridging the down payment divide to qualify borrowers for mortgage financing.
Benefits of MI
- It helps you buy a home, sooner. For the average firefighter or school teacher, it could take 20 years to save the typical down payment. Private mortgage insurers help borrowers qualify with as little as 3 percent down.
- It’s temporary, leading to lower monthly payments. MI can be cancelled once you build 20 percent equity, either through payments or home price appreciation — typically in the first five to seven years. This is not the case for FHA loans, the federal government’s form of MI. The majority of which require MI for the life of the loan.
- It provides several flexible payment options. Your lender can offer several options for MI payment; the most common is paid monthly along with your mortgage.
- It’s tax-deductible. Subject to income limits, MI premiums are tax deductible — similar to interest paid on a mortgage. In 2014, 4 million taxpayers benefited from this deduction with the average being $1,402.
MI is a stable, cost effective way to obtain low down payment mortgages, and offers distinct benefits to borrowers. It’s been a cornerstone of the U.S. housing market for decades, providing millions the opportunity to own homes despite financial barriers. Ask your lender for low down payment options using MI.