Is Private Mortgage Insurance Required for VA Loans?

Private Mortgage Insurance (PMI) and VA loans represent distinct approaches to mitigating lender risk. This article explores PMI and how it differs from VA-backed loans, which assist eligible service members and veterans in achieving homeownership.

Private Mortgage Insurance Explained

Private Mortgage Insurance (PMI) protects the lender, not the borrower, if a homeowner defaults on their mortgage. Lenders require PMI for conventional loans when the borrower makes a down payment of less than 20% of the home’s purchase price.

PMI premiums are paid monthly and added to the regular mortgage payment. The cost varies based on the loan amount, down payment size, borrower’s credit score, and mortgage type. PMI allows individuals to purchase a home with a smaller upfront investment.

How VA Loans Handle Mortgage Insurance

VA loans, backed by the U.S. Department of Veterans Affairs, do not require Private Mortgage Insurance. This is a significant distinction from conventional mortgages and a primary benefit of the VA loan program. The absence of PMI on VA loans is due to the VA’s guarantee to the lender.

The VA guarantees a portion of each VA loan, providing protection to the lender. This government backing reduces risk for private lenders, allowing them to offer favorable terms, including no down payment requirements and the elimination of monthly PMI. Borrowers using VA loans avoid the recurring monthly expense of PMI.

The VA Funding Fee

While VA loans do not require Private Mortgage Insurance, most borrowers pay a one-time VA Funding Fee. This fee helps offset the costs of the VA loan program, ensuring its availability for future eligible service members and veterans. The funding fee is a percentage of the total loan amount and can be financed into the loan, added to the balance and paid over time.

The specific percentage of the VA Funding Fee varies based on several factors: the type of loan (e.g., purchase, refinance), whether it is the borrower’s first or subsequent use of their VA loan benefit, and the amount of any down payment made. For instance, a first-time VA loan user with no down payment might pay 2.15% of the loan amount, while a subsequent user could see a fee of 3.3%. Making a down payment of at least 5% or 10% can reduce the funding fee percentage.

Certain individuals are exempt from paying the VA Funding Fee. These exemptions are primarily for veterans receiving VA compensation for service-connected disabilities. Other exempt categories include veterans receiving retirement or active-duty pay instead of disability compensation, active-duty service members awarded the Purple Heart, and surviving spouses eligible for a VA loan. If a veteran’s disability claim is pending at closing, they may pay the fee and apply for a refund if their claim is approved later.