Quick Answer: 3.5% minimum with an FHA loan, 5% to 10% with a Conventional loan and no down payment at all with a VA loan.  PMI is required on FHA loans, regardless of down payment.  Conventional loans require PMI with anything less than 20% down.  VA carries no PMI, but there is an upfront ‘funding fee’ added onto your loan amount.  

Approximate Read Time: 5 minutes

Despite the problems in the mortgage market over the past few years, you can still obtain home loans with a small down payment.  PMI, or Private Mortgage Insurance, is almost always talked about in a negative light, but the reality is that PMI makes small down payments possible by insuring banks in the case of foreclosure.  Making PMI payments is certainly easier and more affordable than having to save 20% to put down.  

The amount of funds you have set aside for down payment will dictate the kind of loan that makes sense for your situation so I’ll first discuss these options.   After taking a look, I’ll move on to showing you exactly how much PMI costs with each down payment/loan option. 

If you have less than 3.5% saved...

I would personally wait, but if you absolutely have to buy now, or if there is an opportunity that you simply cannot pass up, there are some options.  First, if you are a veteran, you should absolutely apply for a VA loan.  The VA does not require any down payment at all and the terms are excellent.  Pulaski Bank is an approved VA lender and I personally have a lot of experience with these loans.  (More on them here.)

Non-veterans should plan on applying for an FHA loan and pursuing either government sponsored down payment assistance OR asking family members for gift funds.  There used to be a group of non-profit organizations (AmeriDream, Nemiah, Preferred Program, Neighborhood Gold, etc.) that allowed the seller to provide down payment assistance by funneling their sale proceeds through the non-profit, but the government recently closed this loop-hole.

If you have 3.5% to 9% to put down...

You should strongly consider just 3.5% down with FHA.  Even if you could put 5% to 9% down on a conventional loan, it may make sense to hold onto your additional funds.  After all, when you move into your new home, you will have several ‘start-up’ expenses including furniture purchases and endless trips to Target.

Also, the difference in monthly payment between 5% to 9% down with a conventional loan and 3.5% down on FHA is probably not as much as you might think.  PMI payments for conventional loans with less than 10% down are more expensive than they are with FHA, therefore absorbing some of the savings you might expect by putting more money down.

If you have 10%, but less than 20% to put down...

You should probably take a conventional loan as the PMI payments are relatively low.  At this level of down payment, I would only look into FHA financing if your credit score is less than 680, as conventional loans now have fairly aggressive ‘tiers’ that determine your interest rate.  With a score below 680, conventional loan interest rates become so high that FHA is almost certainly the least expensive option, regardless of your down payment.

It may be tempting if you have just under 20% to put down as much as possible, but similar to my advice above, I think it is worth considering holding onto some cash for reserves.  

If you have 20% to put down along with other reserves...

You should probably take advantage of the opportunity to avoid PMI entirely.  If you have more than 20% to put down, you can easily run the calculations to determine if the relative drop in payment makes sense, but I would also talk to an accountant and a financial planner to decide if the larger than required down payment makes for a good tax and investment plan.

So how much does PMI cost?

To keep the numbers relatively consistent, I will use the example of a buyer purchasing a home for $200,000 and running through each type of PMI payment, all based on 30-Year Fixed mortgages.

3.5% Down with FHA

FHA’s version of PMI is technically referred to as MIP, or Mortgage Insurance Premium - I guess the government likes to be different.  In addition to this difference in name, the premium itself is more complicated than on a conventional loan, because it has two parts.

The first part of FHA MIP is called the ‘up-front premium’, which is almost always simply added onto your loan.  After our buyers puts 3.5% down on his $200,000 purchase, we’re left with $193,000.  To calculate the upfront premium, we need to take this amount and multiply is by 1.75% (or .0175), which comes out to $3,377.50.  This figure is the upfront premium, and again, it is usually added into the loan itself, leaving our total loan amount up to $196,377 - I’ll leave off the 50 cents.  The complaint with FHA is that this upfront premium ends up absorbing a lot of what you put down in the first place, however, by making this up-front premium, the monthly MIP payment is quite low.

The monthly MIP is determined by multiplying our total loan amount of $196,377 by .0055 and then dividing by 12.  We’re left with $90 for a monthly MIP payment.  As we’ll soon see, this is less expensive than the...

Conventional Loan with 5% Down

Conventional PMI payment calculation is based on whether you are putting 5%, 10% or 15% down.  There is no up front component unless you specifically opt for one in what’s called a ‘Split-Premium PMI’ plan.    (In some cases, Split-Premium PMI is the way to go, but you’ll have to contact me directly for more details.)

If our buyer puts 5% down, we’re left with a loan amount of $190,000.  The monthly PMI payment is determine by multiplying the loan amount by .0094 and dividing by 12, leaving us with $148.83.  Given that this is significantly more expensive than the monthly premium with FHA, again I think the government loan is worth considering, despite that upfront-premium.  

Conventional Loan with 10% Down

Our loan amount would be $180,000 and the PMI would be calculated by multiplying by .0062 and then dividing by 12.  The result is $93.

Conventional Loan with 15% Down

$170,000 multiplied by .0038, then divided by 12.  We’re left with $53.83.

What about 80/20, 80/15/5 and 80/10/10 loans?

A popular way to avoid PMI, while still putting less than 20% down was to take what were called ‘combo loans’.  You would have one loan at 80% of the sales price and then take a 2nd mortgage for either 20%, 10% or 5%.  In one way these loans were like financing your down payment, allowing the loan holder at 80% to feel protected because some other lender was providing what you could not.  This arrangement was VERY common and during their heyday I would say I did very few non-FHA loans with PMI.  

It turned out that the companies that held these 2nd mortgages did not fare well during the foreclosure epidemic.  Therefore, they have been almost entirely phased out, or at least made so expensive that you would logically choose PMI over a higher cost 2nd mortgage.