Do VA Loans Have PMI: Mortgage Insurance Explained
Mortgage insurance is a safeguard that compensates lenders or investors involved in mortgage-backed securities for any losses they may incur due to a mortgage loan default. Conventional, FHA, and USDA loans all require private mortgage insurance (PMI), a mortgage insurance premium (MIP) or ongoing fees, respectively. But what about VA loans?
No, VA loans do not require any form of mortgage insurance. This distinctive feature benefits active military and Veteran homebuyers, saving them thousands over the life of their loan.
The VA loan guaranty ensures that lenders are repaid on defaulted loans. With VA loan entitlement, the VA guarantees 25% of the home's value, eliminating the need for mortgage insurance. However, paying a VA funding fee is required.
The VA funding fee, a one-time fee VA loan borrowers pay during closing, reduces the strain on U.S. taxpayers and helps keep the program running for future generations. This fee typically amounts to 2.15% of the loan amount but can vary between 0.5 and 3.30%. Borrowers can pay the VA funding fee upfront or roll it into the loan amount.
Certain individuals may qualify for exemptions to this fee, such as:
Conversely, PMI is for conventional loan borrowers who cannot provide a 20 percent down payment. Usually, borrowers must pay PMI monthly until they have reached 20 percent equity in the home.
| VA Funding Fee | PMI |
|---|---|
| For VA loans | For conventional loans |
| One-time payment | Monthly payments until borrower reaches 20% equity |
| Typically amounts to 2.15% of the loan amount | Only required if down payment amounts to less than 20% of loan value |
| Required for most borrowers, but there are exceptions | Compensates lenders if borrower defaults |
| Supports the VA home loan program |
Typically, the VA funding fee is less than PMI. For example, consider getting a $300,000 conventional loan with a standard down payment of 20 percent. To avoid PMI, a borrower would need to come up with a hefty $60,000 cash to pay at closing. Comparatively, a VA funding fee of 2.15% on the same loan value of $300,000 would only be $6,450 and can be rolled into the total loan amount.
FHA loans also require an annual mortgage insurance premium (MIP), which ranges from 0.15 to 0.75%. However, most borrowers will pay .55% of the loan amount each year. If you can make a 10% down payment, MIP will terminate after 11 years. Otherwise, you’ll be required to pay MIP for the entire life of the loan. There's also a one-time upfront mortgage insurance fee amounting to 1.75% of the loan amount, typically rolled into the loan.
It's easy to see how avoiding PMI with a VA loan provides a significant financial advantage, but it's just one of the many benefits military members and Veterans eligible for a VA loan can enjoy.
