Do You Have to Pay PMI With a VA Loan?
Understand the unique financial structure of VA loans and whether Private Mortgage Insurance (PMI) applies.
For eligible service members, veterans, and surviving spouses, securing a home loan is a significant financial goal. The Department of Veterans Affairs (VA) home loan program offers distinct advantages. This article clarifies the role of Private Mortgage Insurance (PMI) in VA loans and details other associated costs and benefits.
The Absence of PMI in VA Loans
VA loans stand apart from many other mortgage options because they do not require Private Mortgage Insurance (PMI). PMI is a type of mortgage insurance typically mandated for conventional loans when the borrower’s down payment is less than 20% of the home’s purchase price. This insurance protects the lender against potential financial loss if a borrower defaults on the loan, not the borrower themselves. Borrowers usually pay PMI as an additional monthly premium, which can add a notable amount to their mortgage payments.
The absence of PMI in VA loans is a direct result of the VA’s loan guaranty. The Department of Veterans Affairs guarantees a portion of each eligible loan to the private lender. This guarantee significantly reduces the lender’s risk, effectively serving a similar purpose to PMI. Because the VA assumes part of the risk, lenders can offer VA loans without requiring this additional monthly insurance. This unique feature can result in substantial savings for eligible borrowers over the loan’s duration.
Understanding the VA Funding Fee
While VA loans do not require PMI, most borrowers are subject to a one-time charge known as the VA Funding Fee. This fee helps offset the cost of the VA loan program for taxpayers and ensures its sustainability. It also allows the VA loan program to offer benefits like no down payment and no monthly mortgage insurance.
It can be paid upfront at closing, reducing the overall loan balance and subsequent interest accrual. Alternatively, many borrowers finance the funding fee by rolling it into their loan amount. While financing the fee avoids a large upfront cost, it increases the total loan amount and the interest paid over the life of the loan.
Funding Fee Exemptions and Rates
Not all VA loan borrowers are required to pay the VA Funding Fee, as specific exemptions apply. Veterans who receive VA compensation for a service-connected disability are exempt from this fee. Additionally, individuals who would receive disability compensation but are receiving retirement pay instead, or those rated eligible for compensation based on a pre-discharge examination, are also exempt. Purple Heart recipients and surviving spouses of veterans who died in service or from a service-connected disability also qualify for an exemption. Eligibility for exemption is typically confirmed through a borrower’s Certificate of Eligibility (COE).
The VA Funding Fee rates vary based on several factors, including the type of loan, whether it is the first or subsequent use of the VA loan benefit, and the amount of any down payment made. For instance, a first-time VA loan user making no down payment might face a funding fee around 2.15% of the loan amount. This rate can increase for subsequent uses, potentially reaching 3.3% without a down payment. However, making a down payment, such as 5% or more, can reduce the fee significantly, often to 1.5% for both first-time and subsequent users. Streamline refinance loans, known as Interest Rate Reduction Refinance Loans (IRRRLs), typically have a lower funding fee of 0.5% regardless of prior usage.
Other Key Advantages of VA Loans
Beyond the absence of PMI, VA loans offer several other advantages for eligible borrowers. A primary benefit is the possibility of no down payment in most cases. This contrasts sharply with many conventional and FHA loans, which typically require a percentage of the purchase price as a down payment.
VA loans also often feature competitive interest rates, which tend to be lower than those offered on conventional loans due to the VA’s guarantee reducing lender risk. The VA limits certain closing costs that borrowers can be charged, and sellers are permitted to contribute towards these expenses, potentially reducing out-of-pocket costs for the buyer at closing.