By Bill Lyons | Published on November 10, 2020
TABLE OF CONTENTS

    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?” More specifically, you may be asking yourself, “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 no down payment and excellent VA loan rates are definitely enticing VA loan benefits, avoiding PMI insurance should not be undervalued, as 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 mortgage insurance and gain a better understanding of what PMI is and how it can increase the costs of homeownership in the long run. To navigate directly to specific answers, use the links below.

    KEY TAKEAWAYS

    • VA loans are a popular alternative to traditional mortgage loans because they offer favorable terms, saving you money and making it easier to secure a loan.
    • Unlike traditional mortgage loans that require monthly private mortgage insurance (PMI) payments, there is no PMI requirement for VA loans.
    • There is a VA funding fee that’s due at closing time, and that fee is based on several factors including the loan type and amount, your down payment, and whether you’re a first-time home buyer.

    Do VA Loans Have PMI?

    No, VA loans do not require PMI. PMI is required on most loans because it is a form of protection for the lender. But, 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 upfront 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%), you can typically apply to remove PMI.

    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 on a traditional mortgage, 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, paying a one-time VA funding fee tends to be less expensive than potentially making years of PMI payments. You can use our VA loan calculator to figure out how much you can save when you’re not making monthly PMI payments.

    Typical PMI Costs

    Typically, PMI is between 0.5% to 2% of your total loan amount. 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

    So do VA loans have PMI? The answer is no—but 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 Veterans Affairs in order to sustain the VA loan benefits program. This fee helps offset costs to taxpayers and is fairly low—between 0.5% and 3.3% of the loan amount. The VA funding 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. For example, 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 several key differences between the VA funding fee and PMI:

    VA funding fee

    • One-time fee
    • Required for most VA home loans
    • Ranges from 0.5% to 3.3% (depending on your down payment, whether it’s your first time using a VA loan, and the type of VA loan you’re using)

    PMI

    • Annual fee
    • Not required for VA home loans
    • Typically averages about 0.5% to 2% annually

    Benefits of Avoiding PMI

    The main benefit of avoiding PMI is that it can significantly reduce your mortgage payments. You can use the money you save to make extra payments on your mortgage or cover other necessities such as home repairs and maintenance, which are usually unexpected costs of homeownership.

    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—all of which can save you even more money on your mortgage.

    VA Loan Eligibility Requirements

    While there are many benefits of securing a VA home loan, not everyone is eligible. There are specific VA loan requirements that must be met in order to be eligible through the Department of Veterans 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 (we can help you obtain your COE)
    • Proof of income
    • Minimum 500 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. Qualifying veterans can now purchase a home valued up to $1,500,000 with zero down payment as long as they meet the requirements.

    However, if you have previously defaulted on a home loan, you will be held to FHFA 2023 loan limits (updated Feb 21, 2023). In most counties, the loan limit is $726,200. 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
    • Taxes

    Many of the closing costs can be negotiated between the buyer (you) and the seller. However, some closing costs, such as brokerage fees and real estate professional commissions, must be covered by the buyer when using a VA loan. Additionally, VA loans require that a seller pay no more than 4% of the home loan in seller’s concessions.

    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 dedication to exceptional customer service. Reach out today to learn more about VA loans and see how much VA loans can save you on mortgage insurance.

    Frequently Asked Questions

    Do VA loans require mortgage insurance if you don’t make a down payment?

    Unlike traditional mortgage loans, VA loans don’t require private mortgage insurance. Even if you don’t make a down payment, you don’t have to worry about paying private mortgage insurance on VA loans. In fact, you don’t have to make a down payment at all to secure a VA loan. Avoiding paying VA loan mortgage insurance can save you a significant amount. Favorable loan terms — including competitive rates and fewer requirements — are the reason VA loans are so popular.

    How much can I save by avoiding PMI with a VA loan?

    The cost of private mortgage insurance varies depending on your credit score and loan terms. Your monthly PMI cost is a percentage of your total loan amount that you pay annually, which can range from about 0.2% to upwards of 2%. While monthly PMI payments are usually no more than a few hundred each month, that can add up to tens of thousands of dollars over a few years.

    Even if you secure a great loan with reasonable PMI payments, those PMI payments will typically cost thousands of dollars. With a PMI-free VA loan, you can save money that you can use to pay off your mortgage more quickly.

    When is the VA funding fee paid?

    The VA funding fee is a one-time fee that’s paid at the time of closing. This fee is a percentage of your total loan, and the amount is based on the total loan amount and what type of loan you get. Depending on the loan type, your VA funding fee may also be based on your down payment amount and whether you’re a first-time home buyer. Funding fees increase after the first use, so first-time home buyers save a significant amount when putting down less than 5%.
    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.