Does the VA Have Mortgage Insurance?

The Department of Veterans Affairs (VA) home loan program does not require traditional mortgage insurance, unlike conventional or FHA-insured mortgages. Instead of recurring monthly payments like Private Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP), VA loans include a one-time VA Funding Fee. This fee helps sustain the program’s operations.

Understanding the VA Funding Fee

The VA Funding Fee is a one-time payment made directly to the Department of Veterans Affairs. Its purpose is to help offset costs to U.S. taxpayers and ensure the VA home loan program remains self-sustaining. This fee allows the VA to continue offering significant benefits, such as no down payment requirements for many borrowers and competitive interest rates, without burdening the general public with the full cost of potential loan defaults.

This fee structure separates VA loans from other mortgage types. Conventional loans often require PMI if the borrower puts down less than 20%, and FHA loans mandate an upfront and annual MIP. The VA’s one-time funding fee contributes to the program’s long-term viability and provides security to lenders.

The VA’s guarantee to approved lenders protects a portion of the loan, reducing risk for financial institutions. This guarantee allows lenders to offer VA loans with more favorable terms. The funding fee directly supports this guarantee, ensuring the VA has resources to cover potential losses and maintain the program’s appeal to veterans and lenders.

Calculating and Paying the VA Funding Fee

The amount of the VA Funding Fee varies based on several factors unique to each borrower’s situation. These factors include the type of loan, whether it is the veteran’s first or subsequent use of their VA loan benefit, and the amount of any down payment made. For instance, a purchase loan for a first-time user with no down payment typically has a funding fee of 2.15% of the loan amount. This fee can increase to 3.3% for subsequent users who do not make a down payment.

Making a down payment can significantly reduce the funding fee percentage. For example, a down payment of 5% to less than 10% on a purchase loan can lower the fee to 1.5% for both first-time and subsequent users. If a borrower puts down 10% or more, the fee can drop to 1.25%. Refinance loans also have varying fees; a VA Interest Rate Reduction Refinance Loan (IRRRL) generally has a flat 0.5% funding fee, while a cash-out refinance might have a fee of 2.15% for first-time use or 3.3% for subsequent use.

Borrowers have two primary options for paying the VA Funding Fee. The fee can be paid as a lump sum at the loan closing, which reduces the total amount financed and, consequently, the interest paid over the life of the loan. Alternatively, most borrowers choose to finance the funding fee by rolling it into the loan amount. This option reduces the upfront cash needed at closing but results in the fee accruing interest over the loan term, increasing the overall cost of the mortgage.

Exemptions from the VA Funding Fee

While most VA loan borrowers must pay the funding fee, specific circumstances allow for an exemption. These exemptions are primarily for veterans with service-connected disabilities. A veteran receiving VA compensation for a service-connected disability is exempt. This also applies to veterans entitled to compensation for a service-connected disability but receiving retirement or active duty pay instead.

Another category of exemption includes active-duty service members who have been awarded the Purple Heart. Surviving spouses of veterans who died in service or from a service-connected disability are also exempt from paying the VA Funding Fee. In situations where a veteran has a disability claim pending at the time of loan closing, they may still pay the fee, but can receive a refund if their service-connected disability compensation is approved after the loan closes.

Qualifying for a funding fee exemption does not impact a borrower’s eligibility for other VA loan benefits. These individuals still enjoy advantages like competitive interest rates, no down payment, and limits on closing costs. The exemption simply removes the one-time funding fee, easing the financial burden of homeownership for eligible veterans and their families.