Do VA Loans Require Mortgage Insurance?

VA loans are a mortgage option designed to help servicemembers, veterans, and eligible surviving spouses achieve homeownership. These loans are provided by private lenders, but a portion of the loan is guaranteed by the Department of Veterans Affairs (VA). The VA’s guarantee allows lenders to offer more favorable terms to eligible borrowers, helping many individuals purchase or refinance a home with competitive interest rates.

Mortgage Insurance on VA Loans

VA loans generally do not require private mortgage insurance (PMI) or any other type of ongoing mortgage insurance. This absence of mortgage insurance is a unique advantage compared to most other home loan options. For instance, conventional loans typically require PMI if the borrower makes a down payment of less than 20% of the home’s purchase price. Similarly, FHA loans include both an upfront and an annual mortgage insurance premium (MIP).

VA loans do not require PMI because of the VA’s guaranty to lenders. The VA guarantees a portion of each eligible loan, typically around 25% of the loan amount. This guarantee significantly reduces the risk for lenders, making separate mortgage insurance unnecessary. This federal backing protects the lender if a borrower defaults on the loan, ensuring reimbursement for the guaranteed portion.

The VA Funding Fee

While VA loans do not require mortgage insurance, they do include a one-time charge known as the VA Funding Fee. This fee helps sustain the VA home loan program for future generations of veteran homebuyers. The funding fee is a percentage of the total loan amount and varies based on several factors. These factors include loan type, whether it is a first-time or subsequent use of the VA loan benefit, and the size of any down payment made.

For first-time VA loan users with no down payment, the funding fee is typically 2.15% of the loan amount. This rate can increase for subsequent uses, reaching around 3.3% for repeat borrowers with no down payment. Making a down payment can reduce the fee; for example, a down payment of 5% or more can lower the fee to 1.5%, while 10% or more can bring it down to 1.25% for first-time users. For VA Interest Rate Reduction Refinance Loans (IRRRL), the funding fee is generally 0.5% regardless of prior usage.

Borrowers have the option to pay the funding fee upfront at closing or finance it into the loan amount. Most borrowers choose to finance it, adding it to the total loan balance paid off over the life of the mortgage. While financing avoids an upfront cost, it results in paying interest on that amount over time.

Funding Fee Exemptions

Certain individuals are exempt from paying the VA Funding Fee.
Exemptions apply to:
Veterans who receive VA compensation for service-connected disabilities.
Veterans rated eligible for compensation based on a pre-discharge examination or review.
Active-duty servicemembers who have been awarded the Purple Heart.
Surviving spouses of veterans who died in service or from a service-connected disability.

If a veteran’s disability claim is pending at the time of loan closing, they may pay the fee and then be eligible for a refund if their claim is later approved with an effective date prior to the loan closing.

Financial Advantages of No Mortgage Insurance

The absence of monthly mortgage insurance payments is a significant financial advantage of VA loans. This can lead to substantial monthly savings for borrowers compared to conventional loans requiring PMI or FHA loans with mortgage insurance premiums. Without these recurring costs, the overall monthly housing expense for a VA loan borrower is considerably lower.

Eliminating monthly mortgage insurance allows borrowers to allocate more of their income towards other expenses or savings goals. Over the entire loan term, these monthly savings can accumulate to thousands of dollars, reducing the total cost of homeownership. This feature, combined with the potential for no down payment, makes VA loans a beneficial option for eligible individuals seeking to purchase a home.