In short, lenders determine if you are required to pay private mortgage insurance (PMI) based on the loan-to-value (LTV) ratio at the time your mortgage closes. If your LTV ratio is greater than 80% based on your mortgage amount and the appraised fair market value of the property, then you are typically required to pay PMI for conventional loans. If your LTV ratio is 80% or less then you are not required to pay PMI.
The source of your equity does not factor into the LTV ratio calculation that is used to determine if you are required to pay PMI nor does it affect how and when PMI is applied. For example, the at least 20% equity position required to avoid paying PMI may come from a down payment funded by personal savings or a gift or it may be existing equity that you already hold in a property you currently own that you are refinancing. This latter scenario applies to properties that you inherit, even if you only inherit a partial ownership interest.
Review What is PMI and When Are You Required to Pay It?
Technically, when you inherit a property, you own it. The fair market value of the property minus any mortgages or liens on the property and ownership interests held by other parties equals your equity in the property. So if you inherit 20% of a property and want to buy-out the parties that own the remaining 80%, your equity position should enable you to avoid paying PMI.
There are a couple of points to keep in mind when you refinance a property to buy-out other equity holders. First, it is important that the property value agreed to by the other owners is consistent with the appraised fair market value. If the property value expectations of the other owners is significantly higher than the actual fair market value then your LTV ratio may exceed 80%, which means you may be required to pay PMI.
For example, let's say you own 20% of a property and both you and the other property owners agree that the property is valued at $100,000. That means you are required to pay $80,000 (80% of $100,000 property value = $80,000) to buy-out the other owners.
If the property appraisal comes in short, say at $95,000, but the other owners refuse to take less than the $80,000 they agreed to, then the LTV ratio is 84% ($80,000 loan amount / $95,000 property value = 84% LTV ratio), which is higher than the 80% threshold, and you may be required to pay PMI. This is why it is important to use a conservative property value when you negotiate buying out other property owners or all parties should agree to use the appraised property value.
The second point to keep in mind is that when you get a mortgage on a property you already own, even if you just inherited your ownership stake, it is technically a cash-out refinance. This designation applies even if you receive no money from the loan and all of the proceeds go to buy out ownership interests held by other parties.
While this approach enables you to buy out the other property owners without using personal funds and potentially not pay PMI (as long as your LTV ratio is not greater than 80%), cash-out refinances tend to charge higher mortgage rates so you should keep this in mind when you review your options. Additionally, the loan terms and qualification requirements may be different if you intend to live in the property versus rent it out so we advise you to confirm these points with your lender before you apply for the loan.
The table below shows mortgage terms for leading lenders in your area. We recommend that you contact multiple lenders to understand how they would handle your unique situation. Plus, shopping lenders is the best way to save money on your mortgage.
"B7-1-02, Mortgage Insurance Coverage Requirements." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.« Return to Q&A Home About the author