Do All First-Time Home Buyers in California Have to Pay PMI?

First-time home buyers in California often have a lot of questions about the different requirements for a mortgage loan. Today, we will address one of the most common questions on this subject:

Do all first-time buyers in California have to pay for PMI?

But there are some exceptions to this general rule, and we will cover those as well.

What Is Private Mortgage Insurance?

PMI stands for private mortgage insurance. It is a type of insurance that protects lenders in the event that a borrower defaults on their mortgage.

PMI is typically required for conventional loans when the borrower makes a down payment of less than 20% of the home’s purchase price. A smaller down payment creates more risk for the lender making the loan. Mortgage insurance is designed to mitigate this risk.

Do All First-Time Buyers in California Pay PMI?

Not all first-time home buyers in California have to pay for PMI. As mentioned above, this will depend on the (A) the size of your down payment and (B) the loan-to-value ratio.

Let’s start by defining the loan-to-value ratio. In order to understand the PMI requirements for first-time buyers, you need to know how the LTV ratio works.

The loan-to-value (LTV) ratio is a financial term used in lending that represents the ratio of a loan amount to the appraised value of a property. It’s calculated by dividing the amount of the loan by the value of the property.

• Example #1: If you buy a home in California valued at $400,000 with a 5% down payment, your loan amount would come to $380,000. So the loan would account for 95% of the property value. In this scenario, the LTV ratio would therefore be 95%.
• Example #2: If you were to increase the down payment amount to 20% for that same $400,000 home, you would end up borrowing $320,000. So the LTV ratio would drop to 80%.

In both cases, we simply divide the loan amount by the home value to determine the LTV.

When the LTV rises above 80%, as in the first example above, private mortgage insurance is typically required. This is true for both first-time and repeat home buyers in California. It’s an industrywide standard that applies to borrowers nationwide.

Exceptions to This General Rule

First-time buyers can avoid paying PMI in several ways. We’ve covered one of those options already. Borrowers who can afford to put down at least 20% on a conventional mortgage loan can keep the LTV ratio below at or below 80%.

Here are two more ways a first-time buyer could avoid private mortgage insurance:

1. Piggyback loans

Even if you can’t afford to make a 20% down payment, you could potentially avoid PMI by using what’s known as a piggyback mortgage strategy. This involves obtaining two loans simultaneously, hence the “piggyback” term.

For instance, the borrower might take out a first mortgage for 80% of the purchase price, along with a 10% second mortgage. The remaining 10% down payment is covered by the borrower’s own funds, in the form of a down payment.

In this scenario, neither one of the home loans would account for more than 80% of the property value. So PMI would not be required in this case. This is a common strategy for first-time buyers in California who wish to avoid the extra cost of mortgage insurance.

2. VA loans

VA loans do not require PMI, regardless of the down payment amount. In fact, a first-time home buyer who uses a VA loan to buy a house in California could finance up to 100% of the purchase price. And even in that scenario, there is no mortgage insurance requirement!

But this program is limited to military members, veterans, and certain qualifying spouses.

The federal government provides a partial guarantee for VA loans, which gives the mortgage lender and added layer of protection against default. Because of this, a first-time buyer can buy a home with no down payment and no mortgage insurance.

Borrowers who use the VA loan program do pay a one-time funding fee, which can be paid upfront or rolled into the loan. But the funding fee is less of a financial burden when compared to the recurring cost of PMI.

The bottom line here is that not all first-time buyers in California have to pay PMI. Generally speaking, it’s only required for borrowers who have a conventional mortgage loan that accounts for more than 80% of the home’s value.

How PMI Benefits First-Time Buyers

While it does increase the size of your monthly payments by a moderate amount, PMI also brings some significant advantages for first-time home buyers. Here are the biggest benefits.

1. A smaller down payment

PMI allows you to purchase a home with a down payment of less than 20%, which can significantly reduce the amount of upfront cash that’s needed. Because of private mortgage insurance, eligible borrowers could get a conventional loan with a down payment as low as 3%.

2. A faster path to homeownership

By reducing the down payment requirement, PMI also helps first-time home buyers in California become homeowners sooner rather than later. It reduces the amount of money that needs to be saved and shortens the path to homeownership.

3. More homes to choose from

PMI enables buyers to purchase homes in more competitive markets or target specific neighborhoods that may have higher median home prices. This can be particularly beneficial for first-time buyers who have their sights set on a particular location or type of property.

Have mortgage questions? Bridgepoint Funding has been helping home buyers in California for nearly 20 years. Please contact us if you have questions about down payments, mortgage insurance, or anything else covered in this article!