VA loans come with lots of benefits, like low interest rates and no down payments. But do VA Loans have PMI? The short answer is no: VA loans do not come with private mortgage insurance. However VA benefits (like not having to make a down payment) aren’t necessarily free. They’re paid for in other ways, such as the VA funding fee. In this article, we’ll take you through how the VA funding fee compares to private mortgage insurance and whether or not it really is a better deal in the long run.
What Is Private Mortgage Insurance (PMI)?
Let’s start with the basics: what is private mortgage insurance? When taking out a conventional home loan, borrowers are encouraged to put as much money down as they reasonably can. If this number turns out to be less than 20 percent of the loan balance, lenders will require borrowers to invest in private mortgage insurance.
Why is this? It’s because down payments serve as an added security for lenders; they exhibit the borrower’s willingness and ability to pay off the loan. But if the borrower can’t make a large down payment, the lender is still going to want some assurance that the mortgage will get paid and that they won’t lose money should the borrower foreclose on the home down the road.
Private mortgage insurance is also required if borrowers are refinancing their home with less than 20 percent equity. How private mortgage insurance is paid varies from lender to lender. Normally, it’s added to your mortgage payment and paid monthly that way.
The VA Funding Fee
Paying down 20 percent of a loan can be difficult. But the VA guarantee on all VA loans allows borrowers to buy a home without putting any money down. And while not many VA loans default or end in foreclosure, the few that do are repaid to the lender via this guarantee. So where does the VA get the money to do this? They get it from the funding fee.
The VA funding fee is tacked onto every VA purchase and refinance loan. It can be paid at closing out-of-pocket or financed into the life of the loan. How much the fee actually costs varies, depending on what kind of veteran the borrower is, whether or not they made a down payment, how many times they’ve taken out a VA loan, and whether or not the loan is a purchase or a refinance. Exact numbers are available on the VA’s website, or in the tables below, in which the funding fee is expressed as a percentage of the loan balance.
For purchase and construction loans:
|Type of veteran||Down payment||Percentage for first-time use||Percentage for subsequent use|
5% or more
10% or more
5% or more
10% or more
For cash-out refinance loans:
|Type of veteran||Percentage for first-time use||Percentage for subsequent use|
For any other types of loans:
|Type of loan||Percentage for either type of veteran, whether first-time or subsequent use|
|Interest Rate Reduction Refinance Loans||0.50%|
|Manufactured home loans||1.00%|
|VA loan assumptions||0.50%|
VA Funding Fee Exemptions
The VA funding fee is required of any borrower taking advantage of the VA guarantee. However, there are instances in which you could qualify for exempt status. These include:
- Disabled veterans who were injured during their service and are receiving disability compensation
- Retired veterans who would otherwise be receiving disability compensation
- Veterans who received VA disability compensation after completing the pre-discharge exam
- Veterans who would have received VA disability compensation had they not been recalled to active duty
- Surviving spouses of veterans whose death was the result of a service-related injury
VA Funding Fee Refund
Similarly, the VA funding fee is refundable under a few conditions. If you qualify for a refund, the money will be sent to you in the same form in which you paid it, whether that be through cash or through financing the fee into the loan balance. Additionally, it’s the borrower’s responsibility to request a refund if they feel they deserve one. Veterans who qualify for a refund include those who:
- Are disabled but whose disability compensation was pending when they closed on the loan
- Were overcharged
The VA Funding Fee vs. PMI
So now comes the big question: is the funding fee cheaper, or better, than private mortgage insurance? Yes, the funding fee is sort of like the VA’s version of PMI, but that doesn’t mean it costs you as much. Let’s look at the pros and cons of each.
As far as cost goes, private mortgage insurance will normally cost you 1 to 5 percent of your principle and will be paid monthly as part of your mortgage payment. Like all insurance premiums, this number will depend on your payment history, the state of the market, and the size of your loan. After you’ve bought at least 20 percent equity in your home, most conventional lenders will allow you to stop paying private mortgage insurance. So, from closing until then, how much will PMI cost you? Well, if it took you 5 years to accrue 20 percent equity, and your loan was $200,000, then in total, you would have paid $10,000 in private mortgage insurance over those five years.
Now let’s do the math for the funding fee. This isn’t a payment you’ll be making every month; instead, the funding fee is paid only once, at closing. Let’s assume that when you close, you pay a funding fee of 2.15 percent. If your loan is still $200,000, that means your funding fee will equal about $4,000. That’s a one-time payment (unless you refinance) almost half the price of all your PMI payments combined.
Considering these numbers, the VA funding fee is definitely more affordable than private mortgage insurance. If you’re ever deciding between a VA loan or a conventional loan, it’s a cost worth looking into.
Great Deals for Veterans
As a veteran, you have the opportunity to enjoy mortgage rates and benefits that most civilians can’t. This is why we at Low VA Rates are so passionate about the VA loan program: we want all our nation’s veterans to be aware and take advantage of the great opportunities available to them. If you still have questions about private mortgage insurance, or if you want to learn more about VA loans in general, visit our website or give us a call at 855-223-0705. We’re excited to hear from you!