Key Takeaways
- In some scenarios, conventional loans do not require mortgage insurance
- Private mortgage insurance (PMI) is required when the borrower’s down payment is less than 20%, or their mortgage has a loan-to-value ratio (LTV) above 80%
- Borrowers with PMI can usually cancel the insurance once the principal balance of their mortgage has decreased down to 80% of the home’s original value
A conventional loan usually requires PMI when the borrower starts with less than 20% equity. On a purchase, that usually means a down payment below 20%. On a refinance, that usually means the homeowner has less than 20% equity in the property at the time of the new loan.
Click to navigate:
1. Why Do Conventional Loans Require Private Mortgage Insurance?
2. When a Conventional Loan Does Not Require Mortgage Insurance
3. Common Misunderstandings About Conventional Loan Mortgage Insurance
4. The Bottom Line on Conventional Loans and Mortgage Insurance
5. FAQs
Why Do Conventional Loans Require Private Mortgage Insurance?
PMI protects the lender against loss if the borrower doesn’t make their loan payments. Essentially, the lower the LTV, the less risk there is for the lender in the event of foreclosure.
This means that two borrowers can both have conventional loans, but only one of them pays mortgage insurance. The borrower with a larger equity position may have no PMI at all, while the borrower with a smaller down payment may pay it monthly, upfront, in a split-premium structure or through lender-paid mortgage insurance (LPMI), which is built into the interest rate—meaning no visible monthly premium but a higher rate—depending on the lender and the loan setup.
When a Conventional Loan Does Not Require Mortgage Insurance
For conforming conventional loans, the 20% equity threshold is the clearest dividing line. For certain non-conforming loans, rules can vary by lender, which is why the loan estimate and pricing details matter. The Consumer Financial Protection Bureau notes that non-conforming conventional loans are less standardized and can vary widely by lender.1
Common Misunderstandings About Conventional Loan Mortgage Insurance
“All conventional loans require PMI.”
False. Conventional loans generally require PMI only when the borrower starts with less than 20% equity, though some non-conforming programs can vary by lender.
“PMI protects the homeowner.”
False. PMI protects the lender, not the borrower.
“PMI lasts for the life of the loan.”
Usually false for borrower-paid conventional PMI. Conventional PMI can often be removed or terminated when specific equity thresholds are reached.
“FHA and conventional mortgage insurance work the same way.”
False. FHA uses mortgage insurance premium (MIP), which has its own upfront and monthly payment rules, and can’t always be canceled. FHA MIP cancels after 11 years if the loan had an LTV of less than 90% at origination. It remains for the life of the loan if the loan had an LTV of 90% or more at origination and can only be removed by refinancing or paying off the loan. On top of that, almost all FHA loans require MIP, regardless of the down payment or LTV, while conventional PMI is generally tied to the sub-20% equity scenario and can often be canceled once the homeowner has built up sufficient equity.
The Bottom Line on Conventional Loans and Mortgage Insurance
A conventional loan requires mortgage insurance when the borrower does not begin with enough equity, which in most cases means a down payment below 20%. It does not mean that every conventional mortgage carries PMI. That is the key distinction.
For many borrowers, conventional PMI is a temporary cost that opens the door to homeownership sooner and can later be removed. For others, putting 20% down is the cleaner path. The smartest move is the one that matches the borrower’s equity position, cash reserves, credit profile and expected timeline for removing PMI.
Frequently Asked Questions
Yes. In many cases, borrowers can request cancellation at 80% of the home’s original value and PMI will always terminate automatically at 78% of the home’s original value if payments are current.
PMI is usually required if the refinance leaves the borrower with less than 20% equity.
No monthly mortgage insurance is required on VA loans, but the VA generally charges a one-time funding fee unless the borrower is exempt.
