Private mortgage insurance (PMI) is typically required for conventional financing. Even FHA has their own version of PMI. Let’s take a look at how VA borrowers avoid this additional cost.
It's no secret, the VA home loan program comes with a laundry list of benefits. Purchasing with no money down, capping what borrowers pay in closing costs and incredibly competitive interest rates (even to borrowers with lackluster credit) are just a few of those benefits.
But there's another big one that often gets swallowed up in all the talk about purchasing without a down payment: the VA loan doesn't require borrowers to pay private mortgage insurance (PMI).
VA loans do not require private mortgage insurance (PMI). No PMI is a unique benefit, as most home loan options have some form of mortgage insurance without a significant down payment.
Avoiding any kind of mortgage insurance saves VA homeowners from paying thousands of dollars in mortgage insurance during the initial stretch of their mortgage term - or the entire term as is typical with FHA loans.
PMI is a staple of conventional home financing. With conventional loans, homeowners who can't bring 20-percent down are typically required to pay private mortgage insurance.
Private mortgage insurance helps insulate the lender from loss if the borrower defaults. With conventional loans, it typically ends when the borrower has 20 percent equity in the home - that same 20 percent figure that lender wanted to see at the outset.
The reality is a 20-percent down payment is difficult to muster for the vast majority of homebuyers. For example, the average VA loan was just over $250,000 in 2019. If a borrower was to purchase a $250,000 home with a conventional loan, they would need to bring $50,000 in cash to meet the threshold for no PMI.
Depending on your purchase price, down payment and other factors, PMI can easily run $150 to $200 per month. The rate for PMI is generally .3 - 1.15% of the entire loan amount each year.
Loans backed by the Federal Housing Administration (FHA) also require annual mortgage insurance, known as a mortgage insurance premium (MIP). Additionally, FHA loans have a one-time upfront mortgage insurance fee of 1.75% of the loan amount, which is typically rolled into the loan.
Annual mortgage insurance for FHA borrowers ranges from .45 to 1.05 percent depending on loan balance and term - though the majority of FHA borrowers pay .85 percent of the loan amount each year.
To put this in perspective, that same $250,000 home would need a minimum 3.5 percent down payment ($8,750), an upfront MIP of $4,221 (that can be rolled into the loan or paid upfront) and $173.88 mortgage insurance premium paid each month for the life of the loan (assuming 3.5% down with a 30-year term).
While the VA loan does not require mortgage insurance, it does have what’s known as the VA funding fee. You can learn about the VA funding fee in detail here, but essentially this is a one-time fee applied to every VA purchase and refinance loan to help keep the program running for future generations.
The VA funding fee is typically 2.30 percent of the loan amount, but ranges between 1.40 and 3.60 percent. The VA funding fee can be paid upfront or rolled into the loan amount, making the VA loan a true $0-down option.
$0 money down is often touted as the VA loan's signature benefit, but it's important VA borrowers realize that's not the only major advantage when comparing loan options.
According to VA estimates, veterans who secured a VA loan last year will save more than $40 billion in private mortgage costs over the life of their loans - a significant sum.
If you're ready to take the next step and get preapproved for a home, give Veterans United a call at 855-870-8845 or fill out this short form here. Preappoval is a non-binding step towards homeownership.
If you have any questions, leave them for us below or continue learning about the benefits of the VA loan here with our complete guide to the VA loan.
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