Quick overview

Private mortgage insurance (PMI) is the fee most conventional lenders require when a borrower’s down payment is under 20% of the purchase price. PMI protects the lender, not you, and can add several hundred dollars to monthly mortgage payments. Fortunately, several legitimate alternatives can lower or remove that cost entirely for eligible buyers. In my 15 years helping borrowers, I’ve seen these alternatives meaningfully change a borrower’s monthly budget and long‑term cost of ownership.

How each PMI alternative works (and who it helps)

Below are the most common alternatives, how they function, typical eligibility, and key tradeoffs.

1) Government‑backed loans (FHA, VA, USDA)

  • FHA loans: Federal Housing Administration loans allow down payments as low as 3.5% and are widely available to borrowers with lower credit scores. FHA uses mortgage insurance premiums (MIP), which differ from conventional PMI. Depending on your down payment and the loan’s case number date, FHA requires an upfront mortgage insurance premium (UFMIP) and ongoing annual MIP that may last many years or for the life of the loan (HUD outlines current rules) (HUD: https://www.hud.gov/program_offices/housing/fhahistory).

  • Pros: Low down payment, flexible credit requirements.

  • Cons: MIP can be required long term; UFMIP is typically financed into the loan.

  • VA loans: VA‑guaranteed loans require no PMI and often require zero down for eligible veterans and active‑duty military members. Instead of PMI, borrowers typically pay a one‑time VA funding fee unless exempt (VA: https://www.benefits.va.gov/homeloans/).

  • Pros: No monthly mortgage insurance, competitive rates.

  • Cons: Funding fee may be financed; eligibility limited to veterans, reservists, and qualified spouses.

  • USDA loans: USDA Rural Development loans can offer 100% financing for eligible rural and suburban properties. Instead of PMI, USDA charges an upfront guarantee fee and an annual fee built into the payment (USDA: https://www.rd.usda.gov/programs-services/single-family-housing-guaranteed-loan-program).

  • Pros: Zero down for eligible borrowers.

  • Cons: Geographic and income eligibility restrictions; guarantee fees apply.

Authoritative resources: Consumer Financial Protection Bureau (CFPB) explains how different mortgage-insurance programs work (CFPB: https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-1438/).

2) Lender‑Paid Mortgage Insurance (LPMI)

With LPMI the lender pays the mortgage insurance premium to the insurer, and you pay for that cost indirectly via a higher interest rate. LPMI eliminates a monthly PMI line item but increases your rate and thus your monthly principal and interest payment for the life of the loan unless you refinance.

  • Pros: No visible monthly PMI; can be beneficial if you plan to sell or refinance in a few years.
  • Cons: Higher interest rate for the loan’s life; you can’t cancel LPMI the way you can cancel borrower‑paid PMI — only refinancing or paying down principal will remove the higher rate effect.

See our deep dive on Lender‑Paid Mortgage Insurance (LPMI).

3) Piggyback (second‑lien) loans — the 80/10/10 or 80/15/5 approach

A “piggyback” combines a primary mortgage at 80% loan‑to‑value (LTV) with a second mortgage for the remainder (often 10% for the second, and 10% down from the buyer). This keeps the first lien at or below 80% LTV so PMI isn’t required.

  • Pros: Avoid PMI while maintaining a conventional first mortgage with potential PMI cancellation rules.
  • Cons: Second liens usually have higher interest rates and fees; two monthly payments and potential prepayment penalties. Second mortgages can accelerate risk if property values fall.

4) Single‑Premium Mortgage Insurance (SPMI)

SPMI lets you pay one upfront lump sum for mortgage insurance instead of monthly PMI. It reduces or removes the monthly PMI payment but increases the amount you must bring to closing.

  • Pros: Avoids monthly PMI payments.
  • Cons: Large upfront cost; if you refinance or sell soon after purchase you may not recoup the expense.

See our related article on when PMI is avoidable: Mortgage Insurance Options: When PMI Is Avoidable.

5) Down‑payment assistance (DPA) and gifts

Many state, local, and nonprofit programs provide grants or low‑interest second mortgages to cover down payments. Gift funds from family are also common and often allowed under conventional and government underwriting when documented properly.

  • Pros: Lowers your initial LTV so PMI may be avoidable or reduced.
  • Cons: Some DPA programs come with resale restrictions or junior liens; underwriters require gift letters and documentation.

6) Shared‑equity and investor partnership programs

Companies such as home‑partnership firms (sometimes called shared‑equity investors) and private family investors can buy a share of your home in exchange for reducing your mortgage size. In return, they claim a share of future appreciation or charge fees.

  • Pros: Reduce mortgage size and avoid PMI; preserve cash flow.
  • Cons: You share future gains and may face contractual constraints; these products vary widely and aren’t regulated like mortgage insurance.

7) Co‑borrowers or co‑signers and improving credit

Adding an eligible co‑borrower with income and assets can improve qualifying ratios and help you meet lender guidelines without PMI alternatives in some cases. Improving your credit score and reducing debt before applying also lowers the lender’s perceived risk and can improve loan options.

Practical pros/cons comparison (quick guide)

  • Best for minimal cash outlay: USDA (if eligible) or VA (if eligible).
  • Best for temporary avoidance (short ownership horizon): LPMI or SPMI if you plan to refinance or sell soon.
  • Best for avoiding monthly fees long-term: VA (no MI) or piggyback with a low‑rate second lien if you can secure favorable terms.
  • Best for borrowers needing assistance: State/local DPA programs and grants.

How to evaluate which option is right for you

  1. Calculate all costs over your expected holding period (N months or years). Compare cumulative cost of borrower‑paid PMI vs LPMI higher interest vs second‑lien interest and fees. A simple net present value (NPV) comparison helps.
  2. Check eligibility: VA and USDA have strict rules; FHA has its own MIP duration rules; piggyback loans require a strong qualification for the second mortgage.
  3. Talk to multiple lenders and request Loan Estimates that show exact PMI or LPMI pricing and second‑lien terms. Under the Truth in Lending Act, lenders must provide comparable estimates so you can compare apples to apples.
  4. Consider future moves: If you plan to refinance in a short period, LPMI or SPMI may be more attractive. If you plan long‑term ownership, avoid permanent costs (like lifetime MIP) when possible.

Real‑world examples (anonymized)

  • Example A: A first‑time buyer qualified for a VA loan and saved hundreds monthly by avoiding PMI. The tradeoff was a 2.3% funding fee financed into the loan—acceptable given long‑term savings (VA: https://www.benefits.va.gov/homeloans/).

  • Example B: A couple with 5% down chose LPMI and took a slightly higher rate because they planned to stay three years and expected a refinance. The short‑term savings beat the long‑term rate cost.

  • Example C: A single mother used an FHA loan plus a state DPA grant for closing costs and down payment. FHA’s MIP was offset by the grant and the lower upfront cash required.

Common mistakes to avoid

  • Focusing only on the monthly PMI line item and ignoring interest‑rate impacts (LPMI increases interest payments for years).
  • Choosing piggyback loans without stress‑testing the family budget against the higher second‑lien payment.
  • Assuming FHA always saves money; its mortgage insurance can remain for years depending on down payment.

Checklists for your lender meeting

  • Request at least three Loan Estimates showing: conventional with borrower‑paid PMI, conventional with LPMI, and an option using a second lien if offered.
  • Ask about DPA programs your local housing authority offers and if you qualify.
  • If considering shared‑equity, request the full contract and a calculator showing the investor’s share over your expected holding period.

FAQ (short answers)

  • Can I avoid PMI with less than 20% down? Yes — through government loans (if eligible), LPMI, piggyback loans, DPA, or shared equity. (CFPB: https://www.consumerfinance.gov/ask-cfpb/what-is-private-mortgage-insurance-en-1438/)
  • Is LPMI better than monthly PMI? It depends on your timeline: LPMI can save money short‑term but often costs more over many years because of higher interest.
  • Will shared‑equity investors take ownership? No — they typically take a contractual share of future appreciation, not day‑to‑day control. Terms vary and must be reviewed carefully.

Final professional tips

  • Run a total‑cost comparison for the period you expect to own the home. I often build a 3‑, 5‑ and 10‑year comparison for clients before they commit.
  • If eligible for VA or USDA, prioritize those programs — they frequently offer the best cost advantage for eligible borrowers.
  • Document gifts and DPA early; underwriting will need clear paper trails.

Sources & further reading

For more detail on lender‑paid options and how PMI can be avoidable in different situations, see our glossary pages: Lender‑Paid Mortgage Insurance (LPMI) and Mortgage Insurance Options: When PMI Is Avoidable.

Professional disclaimer: This content is educational and illustrative. It is not personalized financial, tax, or legal advice. Speak with a licensed mortgage professional or housing counselor to review your specific facts before choosing a loan product.