The Quick Read: Private mortgage insurance (PMI) is required on a conventional purchase loan whenever your down payment is under 20%, meaning the loan is above 80% of the home’s value. It protects the lender, not you. On a borrower-paid policy, you can ask to cancel it at 80% and it must end automatically at 78%, as long as you stay current on payments.
What PMI Is and Why It Exists
PMI is insurance the lender requires when you put less than 20% down. The CFPB says plainly that it protects the lender if you stop paying. You pay for it, and it does nothing for you if you fall behind. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Conventional payment estimate
The starting figures are an example price at the first-time buyer’s minimum down payment. Replace them with yours.
Editable benchmark: 7.32% as of October 22, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a conventional loan quote.
Estimate seeded at the low end of Fannie Mae’s published range (0.58%–1.86% a year); the insurer prices the actual premium on the score and the leverage. Applies only above 80% loan-to-value.
Illustrative starting assumptions: a $350,000 price, the first-time buyer’s minimum down payment, a thirty-year term at the current Freddie Mac benchmark, mortgage insurance at the low end of Fannie Mae’s published range, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a conventional loan quote; your rate is set by the lender at lock. The mortgage insurance figure is an editable estimate seeded from Fannie Mae’s published typical range, not a premium quote; the insurer prices the actual premium, and the cancellation month assumes scheduled payments with no extra principal and no change in value. Taxes, insurance and dues are editable estimates; closing costs are not included. Conforming loan limits apply by county. Licensed in sixteen states for consumer mortgages.
So why do lenders accept small down payments at all? Because PMI shifts part of the loss risk to an insurer. Without it, a 3% or 5% down loan would be a much harder sell. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Think of PMI as the price of admission for a smaller down payment. Skip the 20% and you pay a monthly cost for a while. Save the full 20% and you skip the cost entirely. Neither choice is wrong. It depends on how long saving would take and what the home costs to wait for.
One vocabulary note. PMI belongs to conventional loans. FHA loans use a different charge called MIP. People mix the two terms constantly, and the rules for each are not the same.
When Is PMI Required on a Conventional Purchase?
PMI is required when loan-to-value (LTV) is above 80%. LTV is your loan amount divided by the home’s value. On a purchase, the value used is the lower of the sales price or the appraised value, per the Fannie Mae Selling Guide. Freddie Mac applies the same 80% trigger.
That “lower of” rule matters. Say you agree to buy a home, and the appraisal comes in under the price. The lender uses the appraisal. Your LTV goes up, and the loan can slide into a higher insurance band.
Across the wholesale conventional programs Lendmire places files with, the leverage envelope looks like this:
| Purchase type | Maximum LTV | Down payment |
|---|---|---|
| One-unit primary, first-time buyer, fixed rate | 97% | 3% |
| One-unit primary, other buyers | 95% | 5% |
| Two- to four-unit primary | 95% | 5% |
| Second home | 90% | 10% |
Every figure is subject to lender guidelines and full file review. Nothing here is a commitment to lend.
Occupancy decides the leverage. If the home is a second home, the ceiling drops. Anything beyond a home you live in is a different loan with different rules, so this article stays with the home you plan to occupy.
How a First-Time Buyer Gets to 3% Down
Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
The 97% option exists for buyers who are new to ownership. At least one borrower must be a first-time buyer, which in the program rules means no ownership interest in a residence during the previous three years. The three-year look-back surprises people. If you owned a home five years ago, you may still count as a first-time buyer.
There are two ways into 97% leverage. Fannie Mae’s 97% options page lays them side by side. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
| Feature | Standard 97% | HomeReady / Home Possible |
|---|---|---|
| First-time buyer required | Yes, at least one borrower | No |
| Income limit | None | 80% of area median income |
| Education | Required when all occupants are first-timers | Required on first-time purchases |
Homeownership education is a short course. Fannie Mae says its HomeView course can satisfy the requirement. Plan for it early so it does not hold up your file.
The income cap on HomeReady is the catch. Earn above 80% of your area’s median income and that lane closes. The standard 97% option has no income limit, but you must qualify as a first-timer.
Another detail from HomeReady: it allows community second loans that can push combined leverage past the first mortgage. That helps buyers short on cash. It also adds a second payment, so weigh it carefully.
How a Conventional Loan Is Underwritten, Step by Step
PMI is only one piece of the file. Here is how a purchase moves through review:
1. Application and LTV. The lender calculates LTV from your loan amount and the lower of price or appraisal.
2. Program selection. The lender matches you to standard 97%, a 95% loan, or an income-limited lane like HomeReady.
3. Education. If you are all first-timers and above 95% LTV, a course is required for at least one borrower.
4. Underwriting. Most files run through automated underwriting. The automated finding governs most wholesale conventional files, with a total debt ratio ceiling of 50%.
5. Credit check. The wholesale conventional programs start at a 620 decision score. A manually underwritten file has tighter ratios, 36% or 45%, plus reserve and score factors from the agency’s eligibility matrix.
6. Insurance placement. The lender uses an approved insurer and approved policy forms. The premium shows up on your Loan Estimate and Closing Disclosure.
7. Closing disclosure of removal dates. The CFPB notes you receive a PMI disclosure at closing showing the first date you can request cancellation.
Credit events add waiting periods. These are agency rules, not lender preferences: four years from a chapter 7 discharge, seven from a foreclosure, and four from a short sale or deed-in-lieu. Documented extenuating circumstances can shorten them.
How PMI Affects Your Budget and Approval
PMI is part of your monthly housing cost on a borrower-paid policy. That matters twice. It lowers your monthly breathing room, and it counts in the debt ratios used to qualify you. A higher premium can nudge your approval amount down.
The premium depends on your down payment, your credit profile, the loan term, and the coverage level required at your LTV. Published typical annual premiums run from 0.58% to 1.86% of the loan balance. That is a range, not a quote. Your actual figure depends on your file and the insurer.
Required coverage rises with leverage. Fannie Mae sets coverage by LTV band: 80.01–85%, 85.01–90%, 90.01–95%, and 95.01–97%. The Selling Guide’s coverage page is where those bands live. Coverage percentage is what the insurer must cover. It is not your premium rate, and people confuse the two all the time.
Here is a decision most first-time buyers overlook. Some programs allow minimum coverage instead of standard coverage, but that choice triggers an extra pricing adjustment. A lower monthly insurance cost can come with a cost somewhere else. Ask your loan officer to show both versions side by side.
Borrower-Paid vs. Lender-Paid PMI
Lender-paid mortgage insurance (LPMI) is the version where the lender buys the policy and builds the cost into a higher note rate. Borrower-paid PMI is the standard version, billed as a separate line in your payment.
The tradeoff is permanence. According to the CFPB’s HPA examination procedures, the federal cancellation rules do not apply to lender-paid insurance, and the lender must tell you that you cannot cancel it. The cost sits in your loan until you refinance or sell.
| Feature | Borrower-paid | Lender-paid |
|---|---|---|
| How you pay | Separate insurance charge | Built into the loan’s cost |
| Can you cancel it | Yes, under federal rules | No |
| Best fit | You expect to build equity and drop it | You expect a short stay |
This one is a genuine judgment call. If you plan to stay a long time, borrower-paid usually wins because the charge eventually ends. If you may sell or refinance within a few years, the permanence of lender-paid matters less. Run both before you choose.
How and When PMI Comes Off
The rules for removal are the part buyers most often misunderstand. The 80% mark is a request right, not an automatic drop. The automatic drop comes at 78%.
The CFPB’s page on removing PMI explains that the Homeowners Protection Act covers single-family principal residences closed on or after July 29, 1999. Here is how the three paths work:
| Path | Trigger | What you do |
|---|---|---|
| Request | Balance scheduled to reach 80% of original value | Ask the servicer in writing |
| Automatic | Balance scheduled to reach 78% of original value | Nothing, if you are current |
| Final termination | Midpoint of the loan term, if 78% is not reached first | Nothing, if you are current |
To cancel on request, you need a good payment history, no junior liens such as a second mortgage or HELOC, and proof the home’s value has not dropped below the original value. The servicer may order an appraisal.
You can reach 80% sooner than the schedule says. Extra principal payments help. So can appreciation or documented improvements, though a request based on current value brings in a broker price opinion or an appraisal. Fannie Mae’s servicing rules also set seasoning requirements for those requests, so check the Servicing Guide section on terminating conventional mortgage insurance rather than relying on a rule of thumb.
Occupancy changes the number. For a one-unit primary residence or second home, the request threshold is 80%. For a two- to four-unit primary residence, the same servicing rules use 70%. Servicers must also return unearned premiums within 45 days after cancellation or termination.
A practical checklist for the request:
- Find the date on your closing paperwork.
- Confirm you have no second mortgage or HELOC.
- Make sure no recent late payments are on record.
- Send your request in writing.
- Be ready for an appraisal if you are asking based on value.
Where the General Rule Breaks
The 80% rule is clean. Real files are messier. These are the cases that trip people up.
A junior lien blocks cancellation. Take out a HELOC and you may lose the right to request removal.
A falling value blocks it too. If the home is worth less than at purchase, you may not be able to cancel on schedule.
A late payment can reset the clock. Servicers measure payment history backward from the later of the 80% date or your request date.
A refinance can trigger PMI again. The CFPB says PMI usually applies to a refinance with under 20% equity. Lendmire’s piece How Much a Refinance Costs vs PMI for First-Time Conventional Loan Buyers walks through that comparison.
A 97% refinance has conditions. A rate-and-term refinance can reach 95% LTV on a one-unit primary residence, and 97% where the existing loan is agency-owned and the first-time-buyer program allows. The new loan pays off the first mortgage and closing costs, with only incidental cash back. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
New York is its own animal. Both agencies have New York-specific language on how value is determined. If you are buying there, expect your loan officer to flag it.
A Walk-Through: One Buyer, Start to Finish
Consider a first-time buyer purchasing a one-unit primary residence with 3% down on a fixed-rate loan. LTV is 97%, so PMI is required and coverage sits in the highest band. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
At closing, the disclosure shows the first date a cancellation request is allowed. For the next several years, the buyer pays the premium monthly. Each payment lowers the balance a little. Say home values rise modestly and the buyer adds a few extra principal payments. The balance reaches 80% of the original value ahead of schedule.
The buyer writes the servicer. Payment history is clean, there is no second lien, and value has not fallen. The servicer cancels the insurance and refunds any unearned premium. If the buyer had done nothing, it would end on its own at 78%.
Now flip it. Same buyer, but a HELOC was opened in year three. The request stalls until that lien is dealt with. One decision, a very different outcome.
Ways to Reduce or Avoid PMI
You have a few options, and each has a cost.
- Put down more. At 20% down, PMI never starts. The cost is slower saving.
- Choose borrower-paid over lender-paid. You keep the right to cancel later.
- Pick a program with lower required coverage. HomeReady carries lower coverage levels than standard, at or below 90% LTV, though it comes with the income cap.
- Pay down faster. Extra principal moves your 80% date earlier.
- Compare structures with a broker. Lendmire’s note on whether a wholesale broker can help first-time buyers covers how that comparison works. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Be careful with one idea: skipping PMI by taking a larger, costlier loan structure. That usually moves the expense rather than removing it. Compare the full cost on the Loan Estimate, not just the insurance line.
If you plan to live in a home you are buying, the mortgage insurance question is mostly about timing. How long until you hit 80%, and what will the cost be until then?
Myths First-Time Buyers Believe
“I need 20% down to get approved.” No. PMI is what makes smaller down payments possible. The 97% options exist for this reason. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
“PMI protects me.” It protects the lender.
“PMI drops automatically at 80%.” That is a request right. The automatic drop is at 78%.
“PMI lasts forever, like FHA.” Borrower-paid conventional PMI can be removed. Do not apply FHA’s rules to a conventional loan.
“First-time buyer means I have never owned.” The program definition looks back three years.
“Homeowners insurance and PMI are the same.” Different products. Homeowners insurance protects your property. PMI protects the lender’s loan.
Key Terms Defined
PMI (private mortgage insurance): Insurance on a conventional loan that protects the lender when your down payment is under 20%.
LTV (loan-to-value): Your loan amount divided by the home’s value, shown as a percentage.
LPMI (lender-paid mortgage insurance): A structure where the lender pays the policy and recovers the cost through the loan’s pricing, with no right for you to cancel.
Junior lien: A second loan against the home, such as a second mortgage or HELOC.
Servicer: The company that collects your monthly payment and handles your loan after closing.
Original value: The lower of the purchase price or appraised value at closing, used as the base for cancellation math.
Frequently Asked Questions
Do all first-time buyers have to pay PMI on a conventional loan?
Only if the loan is above 80% LTV. Put 20% or more down and PMI is not required. First-time buyers who use 3% or 5% down will pay it. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
What credit score do I need for a conventional loan?
An adjustable rate under manual underwriting starts at 640. The automated finding governs most files, with a 50% total ratio ceiling. A higher score generally helps your insurance cost, subject to lender guidelines.
Can I get rid of PMI sooner by making extra payments?
Yes. You can request cancellation once your balance reaches 80% of the original value, including through extra principal payments. You still need a good payment history, no junior liens, and no decline in value. The servicer may require an appraisal.
What happens to PMI if I refinance?
A new loan restarts the math. If the new loan is above 80% of the home’s value, PMI usually applies again. If your home has appreciated enough to put you at or below 80%, you may be able to refinance without it.
Is lender-paid PMI a better deal?
It depends on how long you will keep the loan. You cannot cancel lender-paid insurance, so the cost stays in the loan. Borrower-paid usually suits a longer stay, because it ends. Compare both on your Loan Estimate.
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. You can review Lendmire’s conventional loan programs or call 828-256-2183.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. CFPB
2. Fannie Mae Selling Guide B7-1-01
3. Fannie Mae’s 97% options page
4. The Selling Guide’s coverage page
5. CFPB: When Can I Remove Private Mortgage Insurance PMI from My Loan
6. Fannie Mae Servicing Guide B-8.1-04
This article is part of Lendmire’s conventional loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How Much More Down Changes PMI on a 2-4 Unit Conventional Loan · How to Document a First-Time Buyer’s Deposit on a Conventional Loan · How Waiting Compares to Buying Now on a First-Time Conventional Loan
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.