Conventional Loan PMI Rules for Buyers Who Put Less Down

The Quick Read: Private mortgage insurance applies to a conventional loan whenever the down payment is under 20%, meaning the loan-to-value ratio sits above 80%. It protects the lender, not the buyer. It is also not permanent. You can request cancellation once the balance reaches 80% of the home’s original value, and the servicer must end it automatically at 78%, subject to lender guidelines and full file review.

What PMI Actually Is

PMI is an added monthly cost that exists because the lender has less equity cushion. Fannie Mae’s consumer education page says PMI is usually required on a conventional loan when the buyer puts down less than 20%, and that it protects the lender if the buyer stops paying. It is not homeowners insurance. Nothing in it covers your house or your belongings.

Here’s the trade. PMI is the price of buying with a small down payment. Without it, many buyers would wait years to save 20%. With it, a buyer can get into a home sooner, then shed the cost later.

Across the wholesale programs Lendmire places files with, the insurance layer is set by the lender and the insurer. Coverage levels vary by LTV band, loan term and program. You don’t pick the coverage percentage, and you shouldn’t expect to negotiate it line by line. What you can influence is your credit profile, your down payment, and how the premium is structured.

How the Loan Is Underwritten, Step by Step

Step 1: Leverage is set by who you are and what you’re buying. On a one-unit principal residence with a fixed rate, the conventional purchase programs reach 97% LTV (3% down) when at least one borrower is a first-time buyer, meaning no ownership interest in a residence in the previous three years. Otherwise the ceiling is 95% LTV (5% down). Two- to four-unit principal residences also go to 95%. Second homes stop at 90%. Investment property is lower still, so occupancy drives the leverage, and that’s all this article will say about it. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

HomeReady and Home Possible carry an income limit of 80% of area median income. Fannie Mae’s published materials say the 97% options are offered only on fixed-rate loans with terms up to 30 years, and that the loan runs through Desktop Underwriter. Adjustable-rate loans and high-balance loans fall outside that option.

Step 2: The file is run through automated underwriting. The automated finding governs most files. Wholesale conventional programs start at a 620 decision score (640 on an adjustable rate under manual underwriting), with a total debt ratio ceiling of 50% on the automated path. Manually underwritten loans use tighter ratios of 36% or 45%, depending on the reserve and score factors in the Eligibility Matrix.

Step 3: Mortgage insurance gets placed. The insurer, coverage level and payment structure are arranged through the lender. Fannie Mae’s Selling Guide requires that, on loans above 80% LTV, the portion above 80% carry mortgage insurance from an approved insurer. Published typical annual premiums for the programs run 0.58% to 1.86% of the loan balance. That’s a range, not a quote. Where you land inside it depends on LTV, credit score, term and coverage. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Step 4: The appraisal fixes “original value.” Original value generally means the lower of the sales price or the appraised value on a purchase. Every later PMI date is measured against it. Get this wrong in your head and the whole timeline shifts.

Step 5: Closing documents show your dates. The Loan Estimate and Closing Disclosure itemize the mortgage insurance. Per the CFPB, the first date you can request cancellation should appear on your PMI disclosure form. Find that date and write it down.

How PMI Can Be Structured

The payment structure changes both your monthly budget and your exit options. This is where borrowers often miss a real decision.

Financing the premium into the loan is allowed within the maximum LTV. Lender-paid structures deserve a closer look. Federal cancellation rights are written around borrower-paid insurance, and with lender-paid coverage the cost lives in the pricing for the life of the loan. If you expect to keep the loan a long time, that matters. If you expect to sell or refinance within a few years, it can matter less.

This is a genuine toss-up for some buyers. Monthly PMI keeps cash at closing lower and ends on a schedule. A lender-paid option can lower the monthly insurance line but gives up the cancellation path. Which wins depends on how long you’ll hold the loan and how much cash you have at the table.

When Does PMI End?

PMI ends through two federal mechanisms and one backstop, plus a current-value route set by Fannie Mae and Freddie Mac servicing rules.

The Homeowners Protection Act took effect in July 1999. The Federal Reserve’s supervisory summary says it sets rules for cancelling and terminating PMI, requires disclosures and notices, and requires return of unearned premiums. The CFPB’s consumer guidance says the legal requirements apply to single-family principal-residence mortgages that closed on or after July 29, 1999, and that some servicers may allow removal under their own standards.

Request at 80%

You can ask once the balance is scheduled to reach 80% of the original value. Extra principal payments can bring that date forward. The servicer must grant the request if you meet the criteria. Per the CFPB, the request must be in writing, you must have a good payment history and be current, certify there are no junior liens, and provide evidence such as an appraisal that value hasn’t fallen below the original value.

The request must meet several conditions. Miss one and the request can be denied.

Automatic at 78%

The CFPB’s examination manual says the servicer must end PMI on the date the balance is first scheduled to reach 78% of original value, based on the initial amortization schedule, provided you’re current. The manual adds that automatic termination refers only to being current, not to a good payment history. No appraisal. No lien test. No value test.

Because it runs on the original schedule, extra payments don’t move this date. They only help the 80% request.

The Midpoint Backstop

If neither event has ended PMI, the servicer must end it after the loan passes the midpoint of its amortization period. It rarely matters for a loan with decent down payment history, but it’s the floor under the whole system.

Current Value (Where Appreciation Finally Counts)

Here’s where most buyers get it wrong. Home appreciation does not remove PMI on its own. The federal dates use original value. But Fannie Mae and Freddie Mac servicing rules go further than the statute.

Freddie Mac’s Guide describes borrower-requested cancellation based on either original value or current value. Fannie Mae’s servicing process has the servicer verify three things: the LTV meets eligibility criteria, the payment record is acceptable, and the current value is not less than the original value. The payment history is measured over 12 and 24 months back from the later of the 80% date or your request date. The exact seasoning and LTV tiers for current-value requests are set in the servicing guides and vary, so ask your servicer for the current tiers rather than relying on a rule of thumb.

You pay for the valuation. Fannie Mae’s procedure says the broker price opinion or appraisal is at the borrower’s expense and is ordered only after the servicer receives the fee. For one-unit properties that’s typically an interior and exterior BPO. For two to four units, an interior and exterior appraisal. If your request rests on improvements you made, the servicer must include your improvement details in the order.

A recent policy change helps a little. Fannie Mae now permits servicers to solicit borrowers who may be eligible for termination on current value. Permits, not requires. Servicers may contact you, but you aren’t entitled to be contacted. Track your own LTV.

A Worked Example, Without Dollar Figures

Picture a first-time buyer purchasing a one-unit primary residence with a fixed rate at 97% LTV, putting 3% down. At closing, the loan is well above 80%, so PMI is required on the portion above 80%. The Closing Disclosure shows the projected 80% and 78% dates. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

For the first years, the buyer pays principal and PMI together each month. Say the home appreciates meaningfully. The buyer can’t skip ahead on the original-value dates, but can ask the servicer about the current-value route, pay for a valuation, and show a clean payment record with no second lien. If the valuation supports it, the servicer evaluates the request against its tier limits.

Now consider a second buyer in the same house on the same loan who adds extra principal each month. That buyer reaches 80% of original value sooner and can submit a written request earlier. The automatic 78% date doesn’t move, but it may become irrelevant.

Neither buyer got anything automatically except the 78% date. Everything else was a request.

Where the General Rule Breaks

Lender-paid insurance. Cancellation rights are built around borrower-paid coverage. If the cost is baked into pricing, there may be nothing to cancel later. Ask the loan officer which structure is on your Loan Estimate.

Second homes and multi-unit homes. The removal tests are tighter for second homes and two- to four-unit properties than for a one-unit primary residence. Freddie Mac’s Guide Section 8203.2 is the place to check specifics.

Maximum LTV varies by property. One-unit fixed-rate purchases reach 97% for first-time buyers. Manufactured housing sits lower at 95% for standard units, with MH Advantage able to reach 97%, per Fannie Mae’s 97% LTV FAQ. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Refinances. A limited cash-out refinance (rate-and-term) on a one-unit principal residence reaches 95% LTV, or 97% where the existing loan is agency-owned and the first-time-buyer program allows. Above 80%, mortgage insurance applies again, and the clock restarts from the new original value. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

High-risk loans. The Federal Reserve summary notes the 80% and 78% requirements don’t apply to high-risk loans.

Declines in value and junior liens. A request at 80% can be blocked if value has fallen below original or a second lien exists. Automatic termination at 78% has neither test.

Modifications and disasters. A loan modification can change cancellation dates, and Fannie Mae’s guide has a separate payment-record process for disaster-affected borrowers. Ask the servicer for a fresh schedule in either case.

FHA is different. Fannie Mae says FHA mortgage insurance is more complicated and may involve refinancing to remove. Don’t assume conventional rules carry over.

What the Decision Looks Like in Practice

For a buyer with less than 20% down, the real decisions are narrower than the rules suggest. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

Put 3% or 5% down, or wait? A smaller down payment means PMI and a larger balance, but it gets you into the home sooner. If you’d wait years to build a full conventional down payment, the monthly insurance line may be a fair price. If you’re only a few months from that point, waiting may cost less. If you’re a first-time buyer, the 97% program changes that math, since a small down payment is reachable earlier than most people assume.

Monthly or built into pricing? Monthly coverage ends on a schedule. A lender-paid structure may reduce the visible insurance line but has no federal cancellation path. Your expected holding period decides this one.

Extra principal or not? Extra payments pull the 80% request date forward. They don’t move the 78% date. If PMI is a meaningful part of your monthly budget, targeted extra principal can shorten its life. If you’d rather keep cash flexible, the automatic date is your safety net.

Pay for a valuation? Only if appreciation or improvements have likely pushed you well below 80% on current value. A valuation fee against uncertain results is a gamble. Check the servicer’s tiers first.

Questions worth asking your loan officer before closing:

• Is my insurance borrower-paid monthly, single premium, split, or lender-paid?
• What are the projected 80% and 78% dates on my disclosure?
• Does my coverage carry any added pricing adjustment?
• What will my servicer require in writing to cancel?

If a request is denied, the usual causes are a late payment history, a second lien, or a value decline. Fix the specific cause and resubmit.

Key Terms Defined

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

Original value: Generally the lower of the sales price or appraised value on a purchase, the base for the 80% and 78% dates.

Amortization schedule: The planned payoff of the balance over the loan term, which sets the “scheduled” cancellation dates.

Junior lien: A second loan or claim recorded behind your first mortgage, which blocks a borrower-requested cancellation.

LLPA (loan-level price adjustment): A pricing adjustment tied to factors like LTV and credit score, which applies when a lender elects less than standard insurance coverage.

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. The details of conventional loan programs, including the low-down-payment options above, are on Lendmire’s conventional loan programs page, and all figures remain subject to lender guidelines and full file review. This is not a commitment to lend.

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

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. Fannie Mae – What to Know About PMI

2. Fannie Mae FAQs: 97% LTV Options

3. Fannie Mae Selling Guide (Oct 7, 2026 edition)

4. CFPB: When Can I Remove Private Mortgage Insurance PMI from My Loan

5. Federal Reserve – HPA background

6. CFPB – HPA Examination Procedures

7. Freddie Mac Seller/Servicer Guide §8203.2

8. Fannie Mae Servicing Guide B-8.1-04