Understanding VA Loans and PMI
There are many reasons why Veterans choose to buy a home with a VA loan. Attractive rates and no down payments are just two of the key benefits for military borrowers. Those first exploring their benefits often ask, do VA loans have PMI? Fortunately for Veterans, the answer is no.
VA Loans and PMI
Private mortgage insurance (PMI) is required for some conventional and all FHA loans, which can add up to thousands of dollars in fees every year. The primary purpose of PMI is to protect the lender in case the borrower defaults. There are many additional reasons for borrowers to avoid PMI that go even beyond the costs. Consult a CPA, but the rules have changed to where PMI is no longer tax-deductible. And there are no insurance benefits that accrue to the borrower or their family. PMI is strictly default risk insurance that benefits the lender only.
The only way for those taking out a conventional loan to avoid PMI is with a sizable down payment of 20% or more. This is why Veterans are happy to hear that when it comes to VA loans, PMI isn’t a problem — even with zero down.
Find out if you qualify for a VA home loan.
What Do You Save on PMI with a VA Loan?
PMI is calculated each year as a percentage of the entire loan amount. Typical fees are between .5% and 1%, which means the fee on a $400,000 loan could be up to $4,000 a year. In most situations, you’ll have to pay the PMI fee until your equity in the home builds up to 20%. This is a major additional expense for those who cannot afford their initial down payment.
Lenders need to manage their risks, and down payments and PMI are how they do this with conventional and FHA loans. With VA loans, this need is taken care of automatically thanks to the VA home loan guaranty. In the event that a military borrower defaults, the VA will step in and cover the lender’s loss. This takes some of the burdens off of the borrower when it comes to securing a new home.
The VA funding fee is then used to cover some of the default risks that the VA takes on. Unlike PMI, this is a one-time fee that can be waived in certain cases, such as for Purple Heart recipients, or if you are receiving disability payments from the VA. Even with the funding fee, Veterans save serious money versus paying PMI. Our Funding Fee Chart can tell you exactly how much your fee will be, and you can choose to roll your funding fee into your loan payment for a truly zero down purchase.
Find out how our approach to VA loans is different.
What No VA Loan PMI Means for Veterans
Without the need for costly private mortgage insurance, Veteran borrowers can enjoy greater buying power on their search for a home. The fact that you don’t pay PMI with a VA loan can expand your homebuying potential If you’re ready to discover more of the benefits of VA home loans, contact a VA home loan expert today.