VA Loan Benefits: Avoid PMI Costs With a VA Loan
When looking into VA home loans as an option for purchasing or refinancing your home, one of the many questions on your mind might be “what are VA loan benefits?” and more specifically, “do VA loans have PMI?”. During your home loan research, you may have taken note of how PMI, or private mortgage insurance, can increase your costs, but it is required for many mortgage programs.
Avoiding PMI is one of the often overlooked benefits of VA home loans. While 0 down payment and other favorable loan terms are definitely enticing VA loan benefits, avoiding PMI insurance should not be undervalued—not having to pay PMI can actually save you a substantial amount of money.
If you pay car insurance, you know that monthly payments can be frustrating, especially when you’re still paying off the financing on your car even after years of making payments—the same applies to PMI. However, if you’re a veteran or active duty service member, you may be able to avoid paying PMI insurance and significantly reduce your mortgage costs with a VA home loan.
Read on to learn more about the relationship between VA loans and private mortgage insurance—this will answer your questions like “do va loans have PMI?”, “which loans require PMI?”, and “what is the benefit of no PMI?”. To navigate directly to specific answers, use the links below.
- Do VA Loans Have PMI?
- Private Mortgage Insurance Explained
- VA Funding Fee
- Find Out If a VA Home Loan Is Right for You
Do VA Loans Have PMI?
No, VA loans do not require PMI. There is a simple reason for this; PMI is required on most loans because it is a form of protection for the lender. Since the Department of Veterans Affairs backs VA home loans, this already reduces the risk to the lender because, if a VA borrower defaults on their loan, the VA guarantees a portion of the loan.
This guarantee is known as entitlement. VA entitlement is more or less a substitute for the typical down payment. Through the VA entitlement, the VA insures up to 25% of the loan amount.
Private Mortgage Insurance Explained
As mentioned, private mortgage insurance (PMI) is an insurance policy that is designed to protect the lender, should a borrower default on their loan. PMI is charged at an annual rate and is included in your monthly mortgage payment. In some cases, you may be able to pay PMI up front in a lump sum as part of closing costs.
That said, PMI is not necessarily paid over the entire life of the loan. Once you establish enough equity (typically over 20%), PMI will no longer be required.
Down Payments & PMI
Down payment is an important aspect of the home buying process, especially when it comes to paying PMI. This is because a down payment is one way to increase the equity in your home, and reduce the mortgage lender’s risks. So, if you pay a down payment of 20% or higher, you will likely not have to pay PMI.
Loans Requiring PMI
Many types of loans—both private and government-backed mortgages—require PMI. And even the types of loan that don’t have PMI typically require some other type of mortgage insurance.
Regardless of which type of loan you apply for, you’re likely going to have to pay some kind of fee or PMI that will reduce the lender’s level of risk—meaning the funding fee for VA loans and pmi requirements serve a similar purpose. However, the rates or cost may be lower for other types of mortgages such as VA loans and FHA loans.
Typical PMI Costs
Typically, PMI is between 0.5% to 1% of your total loan. Let’s take a look at how this would be applied to your mortgage loan.
For example, let’s say you have a $300,000 mortgage loan. With PMI of 1%, that would be $3,000 per year. When broken down into 12 months (and added to your monthly mortgage payment) this would be an additional $250 per month.
On the other hand, if you choose to pay PMI as part of your closing costs, you would need to make a lump sum payment on top of your closing costs. Or a third payment option is a hybrid solution, where you would pay a lump sum portion at closing and the rest of your PMI as monthly payments that are factored into your monthly loan payment.
Your mortgage lender can help you break down the specifics based on your situation to help you determine which PMI payment option is best given your financial situation.
VA Funding Fee
While the answer to your initial question, “do VA loans have PMI?” is no, there is another fee associated with VA loans that you may need to pay. This is known as the VA funding fee.
The VA funding fee is a fee put in place by the U.S. Department of Veteran Affairs in order to sustain the VA loan benefits program. This fee helps offset costs to taxpayers and is fairly low—between 0.50 percent and 3.3 percent of the loan amount. The VA fund fee varies depending on the borrower’s service history and the loan type.
However, not all VA loan borrowers have to pay the VA funding fee. Those who are eligible for or are currently receiving disability pay due to a service-related injury are exempt from paying the VA funding fee on their loan.
VA Funding Fee vs. PMI
There are a several key differences to note:
VA funding fee
- One-time fee
- Required for most VA home loans
- Ranges from 1.4% to 3.6% (depending on your down payment (if any) and whether it’s your first time using a VA loan)
- Annual fee
- Not required for VA home loans
- Typically averages about 0.5% to 1% annually
One other important thing to keep in mind when comparing the funding fee for VA loans and PMI is that they are both designed to protect the lender’s interests. Regardless of whether you end up having to pay the VA funding fee or PMI, you will still be at risk of losing your home if you fail to meet your payments.
Benefits of Avoiding PMI
You likely felt relief upon finding that the answer to “do va loans have PMI” was no, but let’s dive deeper into why it’s considered to be one of the primary benefits of VA home loans. The main benefit of avoiding PMI can significantly reduce your overall mortgage cost, meaning you can use this money toward making extra payments on your mortgage or covering other necessities (including home repairs and maintenance, which are usually unexpected costs of home ownership).
Additionally, not having to pay PMI by using a VA purchase loan means that you also enjoy all the benefits of VA home loans. This includes not having to make a down payment and possibly qualifying for a lower interest rate than you would with a conventional loan—further saving you money on your mortgage.
VA Loan Entitlements
VA entitlement is a benefit for active duty service members, veterans, and qualifying family members that allows these individuals to qualify for a home loan without the need for a down payment. Instead, with a VA entitlement, the Department of Veterans Affairs guarantees 25% of the loan value to the lender.
VA Loan Eligibility Requirements
While there are many benefits of securing a VA home loan, not everyone is eligible. There are specific service requirements that must be met in order to be eligible through the Department of Veteran Affairs, including:
- You have served 90 consecutive days of active service during wartime or 181 consecutive days during peacetime
- You have completed 6 years of service in the National Guard or Reserves
- You are the surviving spouse of a service member who died in the line of duty or due to a service-related disability
There are also VA loan eligibility requirements for your mortgage lender. At Griffin Funding our VA home loan requirements include:
- Obtain a certificate of eligibility (a CEO can be requested electronically with our help)
- Income qualification
- Minimum 550 FICO score
- 2-year waiting period for foreclosures, short sales, and Chapter 7 bankruptcies
- 1-year waiting period for Chapter 13 bankruptcies
- Completion of pest inspection and VA appraisal
To find out if you qualify for a VA home loan, speak with one of our knowledgeable loan specialists.
VA Loan Limits
There is no limit on the amount you can borrow with a VA home loan, only how much you can borrow without a down payment.
As of 2020, individuals who still have their full entitlement (or have fully restored it) are no longer subject to loan limits. The Blue Water Navy Vietnam Veterans Act of 2019 has also authorized changes to VA home loans as of January 1, 2020. Under the Act, qualifying veterans can now purchase a home valued up to $1,500,000 with zero down payment (given that they meet the requirements).
However, if you have previously defaulted on a home loan, you will be held to FHFA 2020 loan limits. In most counties, the loan limit is $510,400. However, in more competitive housing markets with higher costs of living, the loan limit may be higher.
VA Closing Costs
While you may not have to pay PMI, there are still closing costs associated with VA home loans. Some of these closing costs may include:
- Loan origination fee
- Recording fee
- Appraisal fee
- Title insurance
Many of the closing costs can be negotiated between the buyer (you) and the seller, however, this is a maximum for how much of the closing costs the seller can cover.
For more information on VA home loans, visit VA.gov or contact us to review your loan options with one of our loan specialists.
Find Out If a VA Home Loan Is Right for You
If you are a veteran or service member, it’s likely that a VA loan will provide you with the greatest benefit when purchasing or refinancing a home. And, when you apply for a VA home loan with Griffin Funding, you’ll also enjoy the advantages of our cutting-edge technology, highly competitive loan rates, and dedicated to exceptional customer service.