Buying a home is essential in the pursuit of the all-American dream.

Unfortunately many people don’t believe it is possible to achieve that dream because of the amount of money required to make a down payment on a new home.

However it is possible to become a homeowner with a lower than 20% down payment. Private mortgage insurance was created just for this purpose.

Private mortgage insurance or PMI as it is sometimes known, is extra money borrowed built into the original mortgage loan. This is necessary in cases when the potential homebuyer doesn’t have at least 20% of the asking price.

Twenty percent is usually considered a reasonable amount for a down payment on a home. That extra money essentially becomes the down payment. It helps lenders protect themselves against possible loan default.

An advantage to PMI for the borrower is that it helps enable them to purchase a home without the necessity of delaying home ownership due to lack of available funds.

Typically, a homebuyer using private mortgage insurance only has to have a down payment of 3 to 5% as opposed to the 20% necessary for traditional mortgage loans.

The Homeowners' Protection Act

In 1998 under a fairly recent federal law, The Homeowners’ Protection Act requires financial institutions to inform the consumer of certain issues regarding PMI.

This act necessitates the need for lenders to disclose information like the requirements for a homeowner to request cancellation of private mortgage information and to inform the client of laws governing automatic termination of PMI.

The HPA was put in place to provide relief to homeowners that needed PMI in the first place. With lenders being required to disclose the terms of PMI cancellation and termination, the consumer has the ability to lessen their financial burden if they qualify.

There are certain requirements that have to be met before private mortgage insurance can be discontinued. Before the HPA was introduced consumers were required to keep track of their loan and try to determine when PMI could be dropped.

That means homeowners had to know when 80% of the value of their home had been paid and they had to have maintained a good payment history. Many consumers were unaware that it was even possible to do away with PMI and paid thousands of dollars over the course of years. Obviously this was not a good way to do business.

Under the new law, it is both the client’s and the lender’s responsibility to be aware of how long private mortgage insurance is needed.

The requirements for canceling private mortgage insurance are relatively straightforward. The client has the right to request cancellation if the following criteria is met. A good payment record has to be established.

There cannot be any more than one late payment of over 30 days in the same year as the termination request or no payments more than 60 days late in the last two years.

The home must be paid down to the point that 80% of the original price or the value of home at the purchase date. A lender may request proof of the current value of the house. Private mortgage insurance is beneficial to both the lenders and the consumer.

It allows for early home ownership for the client and added protection for the lender. Understanding how the process works can help people finally achieve the American dream.