Can You Avoid PMI on a Conventional Loan Without a Fifth Down?

The Quick Read: Sometimes, but not for free. On a conventional loan above 80% loan-to-value, mortgage insurance is required unless the lender supplies another approved form of credit protection. You can skip the monthly PMI line, but the cost moves somewhere else: into a higher rate, into a second loan, or into a smaller premium on a low-down-payment program.

Here is the plain version. A fifth down (20%) keeps the first loan at 80% of the home’s value. That is the clean way to avoid mortgage insurance. Put less down and you are choosing which route carries the cost. None of the routes is a free pass, and for some buyers paying regular PMI is the smarter move.

What Does “No PMI” Actually Mean?

“No PMI” means no separate monthly insurance line on your statement. It does not mean no cost. The lender still needs protection on a loan above 80% of value, so the cost shows up elsewhere. Three routes cover nearly every case.

Under Fannie Mae’s Selling Guide, a loan above 80% LTV needs mortgage insurance unless the lender provides another charter-compliant form of credit enhancement. That one exception is where every “no-PMI” product lives. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Loan-to-value (LTV) is your loan balance divided by the home’s value. On a purchase, the value is the lower of the sales price or the appraised value. That detail matters. A low appraisal can push a structure you planned at 80% back over the line.

Here are the three routes at a glance:

Route One: Lender-Paid Mortgage Insurance

Lender-paid mortgage insurance (LPMI) means the lender buys the policy and recovers the cost through a higher interest rate. You see no PMI line. You see a higher rate for as long as you hold the loan.

Both agencies accept this structure. Freddie Mac’s Guide says it buys loans with single, annual or monthly lender-paid MI that meet its requirements. Fannie Mae accepts lender-purchased MI on all loan types except convertible adjustable-rate mortgages.

Here’s the catch. LPMI is a one-way door. Federal rules on PMI cancellation do not let you cancel it or have it end automatically at 78%, as the CFPB’s Homeowners Protection Act examination procedures confirm. The rate stays baked in. The only way out is a refinance or a sale.

That makes LPMI a fit for a certain buyer: someone who expects to sell or refinance within a few years. It is a poor fit for someone who plans to stay a long time and expects fast equity growth. The break-even point depends on your rate, your balance, and how long you stay. Ask the lender to show both versions side by side on a Loan Estimate and compare the full terms.

Route Two: The Piggyback Structure

A piggyback keeps the first mortgage at or below 80% LTV and uses a second loan to fill part of the gap. With no mortgage insurance on the first loan, the monthly PMI line disappears. Eligibility is subject to lender guidelines and a complete review of property type, leverage, and credit.

The second loan is not free money. It has its own payment, its own terms, and its own rules. Fannie Mae requires lenders to count every subordinate lien in the combined ratios (CLTV and HCLTV) and to disclose it to the appraiser and the mortgage insurer, per its subordinate financing policy. The Eligibility Matrix sets the maximum combined ratios by occupancy, unit count and transaction type.

Three things trip people up:

• Two payments. Your monthly budget carries both loans, and the second may have different terms than the first.
• Availability. Whether a piggyback is offered depends on the lender’s product set and overlays. Many programs do not offer it at all.
• Appraisal risk. If the appraisal comes in low, the first loan can land above 80% and bring the insurance requirement back.

Thinking it through, a piggyback tends to suit the buyer who is just short of a fifth down and has steady income to carry two payments. It suits the buyer who wants a short path to one clean first loan less well. “A piggyback is always cheaper” is a myth. Sometimes it is. Sometimes it isn’t.

Route Three: Pay Less for Mortgage Insurance

Some programs shrink the insurance instead of removing it. Fannie Mae’s HomeReady and Freddie Mac’s Home Possible reduce the MI coverage the loan requires. They do not waive it above 80% LTV. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

Freddie Mac’s Home Possible fact sheet lists standard or custom MI coverage by LTV band. Custom coverage can carry a credit fee in the pricing. HomeReady and Home Possible also carry an income limit of 80% of area median income.

Across the wholesale conventional programs I arrange, the standard purchase paths look like this, subject to lender guidelines and full file review:

• 97% LTV (3% down): a one-unit principal residence with a fixed rate, when at least one borrower is a first-time buyer. First-time here means no ownership interest in a residence in the previous three years.
• 95% LTV (5% down): other one-unit principal residence purchases, and two- to four-unit principal residences.
• Second homes: up to 90% LTV. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

Mortgage insurance applies on all of these above 80%. The agencies are not forgiving you the insurance. They are lowering the entry price. Credit score, LTV and occupancy decide which structure is open to you, and published typical annual premiums run roughly 0.58% to 1.86% of the balance. That is a range, never a quote. Your actual figure depends on your file.

One note on credit. A higher score lowers the cost of PMI. It does not remove the requirement. Some pages online blur that line. The wholesale conventional programs I work with generally start at a 620 decision score, and the automated finding governs most files with a total ratio ceiling of 50%.

Premium Timing: Monthly, Single or Split

You can also change when you pay for the insurance. Borrower-paid MI can be monthly, a single premium, or a split of both. A single premium is paid at closing or financed, within limits.

Those limits are set by the agencies. Fannie Mae says the loan amount including a financed MI premium cannot exceed the loan limit, and the purpose must be a purchase, construction or limited cash-out refinance, per its financed MI policy. Freddie Mac caps the gross LTV with a financed premium at 95%, and 97% for Home Possible, HomeOne and HeritageOne.

Paying up front lowers the monthly line. It also puts cash at risk if you sell or refinance early. A single premium is rarely refundable in the way people assume. Ask the lender how it works for the specific policy.

Which Route Fits Which Buyer?

The right route depends on cash, how long you will hold the loan, and how much monthly flexibility you have. Use these if-then rows as a starting point, not a verdict.

This is a toss-up more often than lenders admit. A more affordable path on paper depends on how long you keep the loan, and nobody knows that on day one. A buyer who plans to stay five years and ends up staying twelve can flip which option won.

Should You Just Pay PMI?

Often, yes. Paying PMI on purpose is a legitimate choice, not a failure. It lets you buy sooner with less cash, and it can come off later.

Borrower-paid PMI has built-in exits. Under the Homeowners Protection Act, you can request cancellation when your balance reaches 80% of the home’s original value, with a good payment history, no subordinate liens, and no decline in value. The servicer must terminate it automatically at 78% if you are current. That is the CFPB’s plain-language rule.

Fannie Mae’s servicing rules add detail by occupancy:

• One-unit principal residence or second home: automatic termination at a scheduled 78% of original value, if payments are current. If that point is not reached first, termination comes at the midpoint of the amortization term. Requested cancellation is at 80%.
• Two- to four-unit principal residence: the threshold is 70% of original value.

Appreciation can speed this up, but it is not automatic. Cancelling based on current value requires a valuation, a clean payment record and seasoning. On one-unit properties the servicer orders a broker price opinion or, where law requires, an appraisal, and the cost falls on you, per Fannie Mae’s servicing guide. So “appreciation always cancels it” is a myth.

Myths Worth Dropping

• “No PMI means no insurance cost.” With LPMI the cost is in the rate, and you cannot cancel it.
• “PMI ends exactly at 20% equity on its own.” You can request cancellation at 80%. Automatic termination comes at 78%.
• “Low-down-payment programs waive MI.” They reduce coverage. Above 80% LTV the loan still carries MI.
• “A higher credit score removes PMI.” It lowers the cost. It does not remove the requirement.
• “A piggyback is always cheaper.” The second loan adds its own payment and terms. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Key Terms Defined

PMI (private mortgage insurance): Insurance on a conventional loan that protects the lender, not you, if you stop paying.

LTV (loan-to-value): Your loan balance divided by the home’s value, shown as a percentage.

CLTV (combined loan-to-value): The same ratio, but counting every loan secured by the home, including a second lien.

LPMI (lender-paid mortgage insurance): Insurance the lender buys and recovers through a higher rate. You cannot cancel it.

Piggyback loan: A second mortgage taken alongside the first to keep the first loan at or below 80% LTV. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

Subordinate lien: A loan secured by the home that ranks behind the first mortgage.

What to Ask a Lender Before You Choose

Bring these questions to the first conversation. They turn a vague “no PMI” pitch into something you can compare.

1. Where does the insurance cost go in this structure: the rate, a second loan, or a premium?

2. Can this ever be cancelled, and at what point?

3. What happens to this structure if the appraisal comes in low?

4. If I sell or refinance in a few years, which option leaves me better off?

5. Can you show me each version on a Loan Estimate so I can compare the full terms?

If your income is not a standard salary, the file works differently. Lendmire’s piece Self-Employed Mortgage vs. Conventional Loan With Low Down and No PMI walks through that case.

If you are buying a home and want to see whether a conventional loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Start with Lendmire’s conventional loan programs, subject to lender guidelines and full file review.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae Selling Guide B7-1-01: Provision of Mortgage Insurance

2. Freddie Mac Guide Section 4701.2

3. CFPB’s Homeowners Protection Act examination procedures

4. Fannie Mae Selling Guide B2-1.2-04: Subordinate Financing

5. Eligibility Matrix

6. Home Possible fact sheet

7. Fannie Mae Selling Guide B7-1-04

8. CFPB: When can I remove PMI from my loan?

9. Fannie Mae Servicing Guide B-8.1-04: Termination of Conventional Mortgage Insurance

10. Fannie Mae Servicing Guide F-1-02