Is Mortgage Insurance Required for VA Loans?

VA loans do not require traditional mortgage insurance, such as Private Mortgage Insurance (PMI) for conventional loans or Mortgage Insurance Premiums (MIP) for FHA loans. This eliminates the monthly insurance payments that add substantial costs to a homeowner’s expenses. Instead, the VA loan program includes a one-time fee known as the VA Funding Fee. This fee helps ensure the program’s sustainability for eligible service members, veterans, and their surviving spouses.

The VA Funding Fee

The VA Funding Fee is paid directly to the Department of Veterans Affairs. Its primary purpose is to help offset the costs of the VA loan program, reducing the burden on taxpayers and allowing the program to continue offering benefits like no down payment requirements and competitive interest rates. Unlike recurring monthly mortgage insurance payments, the VA Funding Fee is a single payment made at closing.

The amount of the VA Funding Fee is not fixed; it is calculated as a percentage of the loan amount and can vary based on several factors. These factors include whether it is the veteran’s first time using their VA loan benefit or a subsequent use, the type of loan (e.g., purchase, refinance, cash-out refinance), and the amount of any down payment made.

For instance, a first-time VA loan user with no down payment might pay a funding fee around 2.15% of the loan amount, while subsequent users without a down payment could see a fee of 3.3%. Making a down payment, even a small one, can significantly reduce the funding fee percentage. For example, a down payment of 5% or more can lower the fee to about 1.5% for first-time users, and a 10% or greater down payment can reduce it further to around 1.25%. Refinance loans, such as an Interest Rate Reduction Refinance Loan (IRRRL), generally have a lower funding fee, often around 0.5% regardless of prior use.

Exemptions from the VA Funding Fee

Not all eligible individuals are required to pay the VA Funding Fee. The Department of Veterans Affairs provides exemptions for certain veterans and their families. These exemptions are typically granted to veterans who receive VA disability compensation for service-connected disabilities, including those entitled to compensation but receiving retirement or active-duty pay instead. An exemption also applies to active-duty service members awarded the Purple Heart. Surviving spouses of veterans who died in service or from a service-connected disability, and who are eligible for a VA loan, are also exempt. If a veteran’s disability claim is pending at closing, they might pay the fee initially but could receive a refund if compensation is approved later. Verification of exemption status is typically noted on the veteran’s Certificate of Eligibility (COE).

Payment of the Funding Fee

The VA Funding Fee is due at loan closing. Borrowers have a few payment options. The fee can be paid upfront in cash as part of the closing costs, which reduces the total loan amount and overall interest paid over the loan’s life. Alternatively, many borrowers finance the funding fee by rolling it into the loan amount. While this eliminates the need for a large upfront payment, it increases the total loan balance and results in paying interest on the funding fee over the loan’s term, increasing the overall cost. Sellers can also contribute towards closing costs, including the funding fee, typically up to a certain percentage of the loan amount.