Avoid PMI with a VA loan | Save thousands with this benefit
Do VA loans have PMI?
No, VA loans don’t have private mortgage insurance (PMI) and this benefit alone could reduce your mortgage costs by thousands of dollars.
VA loans, which are backed by the Department of Veterans Affairs, are available to active-duty service members, veterans and their families. These loans carry a number of valuable benefits and below we’ll explain how much you can save by avoiding PMI with the VA loan program.
What is PMI?
With any mortgage other than a VA loan, if you’re making a down payment of less than 20%, you can expect to pay mortgage insurance. Mortgage insurance allows the lender to mitigate the additional risk it assumes with a low-down payment mortgage.
There are two main types of mortgage insurance:
- Private mortgage insurance (PMI): Associated with conventional loans and provided by a third-party insurer
- Mortgage insurance premiums (MIP): Applies to government-backed FHA loans
Unfortunately, mortgage insurance protects the lender, not the borrower. Even though the borrower is making the payments, any payout in the event of foreclosure goes straight to the lender.
Still, mortgage insurance isn’t just a burden. It can make homeownership more accessible for those still trying to save a down payment, particularly in places where home prices are rising rapidly. For many homeowners, home appreciation significantly outstrips the cost of mortgage insurance.
So mortgage insurance has its upsides. Still, avoiding it altogether with a VA loan can save you thousands of dollars — maybe even tens of thousands.
VA funding fee vs mortgage insurance
With a VA loan, you don’t pay for mortgage insurance. This is one of the most significant benefits of this mortgage program, one that can easily save borrowers tens of thousands of dollars over the life of their loan.
However, with a VA mortgage, you will pay a one-time VA funding fee. The VA funding is a small percentage of the total loan amount, which you can either pay at closing or roll into your mortgage loan balance and pay off over time.
In a sense, the VA funding fee buys you out of paying mortgage insurance. But it pays for more than just that. These fees allow the VA mortgage program to be self-sustaining, and to continue to offer a multitude of benefits to VA borrowers, including zero down payments and competitive mortgage rates.
The first time you buy a home with a VA loan, the VA funding fee is 2.3% of the loan amount. For any subsequent purchases, it’s 3.6%.
The good news is the fee goes down if you make a down payment. With a 5% down payment, the VA funding fee is just 1.65%. With 10% down, it drops to 1.4%. Those lower rates apply to both your first-time use and subsequent ones.
|Down payment amount||VA funding fee|
|First use||Less than 5%||2.3%|
|5% or more||1.65%|
|10% or more||1.4%|
|Subsequent uses||Less than 5%||3.6%|
|5% or more||1.65%|
|10% or more||1.4%|
How much can you save by avoiding mortgage insurance?
By avoiding mortgage insurance with a VA loan, you can save thousands of dollars every year on your mortgage.
Below, we crunched the numbers to determine what mortgage insurance might cost you on a $300,000 loan.
Save thousands of dollars by avoiding PMI
Suppose you want to purchase a home through Fannie Mae’s HomeReady® program. This low-down payment program allows you to purchase a home with a conventional mortgage with as little as 3% down.
You won’t pay any mortgage insurance on closing, but you will pay an annual PMI premium, due in monthly installments. This premium is typically between 0.19% and 1.86% of your total loan amount, depending on your credit score and debt-to-income ratio.
If you have a $300,000 mortgage and are paying a 1.2% PMI premium, you’ll pay roughly $3,600 — or $300 a month — for the first year, in addition to your mortgage payments. That amount will go down gradually as you pay off your mortgage debt.
The good news is you only have to pay for PMI until you have 20% equity in your home. Once your mortgage drops to 80% of your home value, PMI will automatically be removed. If you live somewhere with sharply rising home prices, that could happen quickly.
PMI vs MIP
The mortgage insurance associated with government-backed FHA loans is a bit more complicated. It won’t automatically drop off once you’ve achieved 20% equity.
You’ll have to pay MIP until you sell your home, refinance it or pay off your mortgage in its entirety.
The only exception is for FHA homeowners who put down 10% or more. In that case, mortgage insurance premiums fall off after 11 years.
For an FHA loan, the annual premium is set at 0.85% of the loan amount. This is paid in monthly installments along with your mortgage payments.
In addition to the annual mortgage premiums, you’ll be required to pay an upfront mortgage insurance premium (UFMIP) equal to 1.75% of the total loan amount. Luckily, you do not need to pay this at closing. Most FHA borrowers roll it into their loan balance to avoid the extra upfront cost.
To use our $300,000 example mortgage from above, this works out to $5,250 UFMIP fee, and $2,550 in mortgage insurance premiums for the first year — roughly $212 a month. As with PMI, your annual premiums will drop as your mortgage balance does but it will happen very gradually.
Is the VA funding fee more expensive than PMI or MIP?
Though the VA funding fee might look like a big chunk of money upfront, it’s significantly less expensive than PMI or MIP.
To refer back to our previous $300,000, a first-time VA mortgage with no down payment can expect to pay a VA funding fee of $6,900.
With PMI, you’ll pay nothing upfront and your first year of mortgage insurance will cost $3,600. But unlike the VA funding fee, your mortgage insurance costs will be ongoing and by the end of your mortgage’s third year, you’ll have paid more than $10,000 towards PMI.
The numbers are even more dramatic with the MIP on an FHA loan. The initial premium payment of $5,250 and the $2,550 for the first year of annual premiums total out to $7,800 — already more expensive than the one-time VA funding fee.
The math gets even better for VA borrowers who can make a down payment. With just 5% down, the VA funding fee on that same $300,000 loan drops to $4,950.
Additionally, keep in mind that VA loans offer some of the most competitive mortgage interest rates on the market. The money you save on PMI or MIP is only part of the overall savings that a VA loan offers.
Plus, you don’t need to come up with the entire VA funding fee in cash at closing. In some cases, you may not even need to pay it at all.
Who is exempt from the VA funding fee?
Not all VA borrowers have to pay the VA funding fee. Many eligible VA borrowers, including Purple Heart recipients and surviving spouses, are exempt.
Your Certificate of Eligibility (COE) indicates whether you are required to pay the VA funding fee. Your loan officer can help you request your COE, which includes important information about your military service, the amount of VA loan entitlement, and the details of your funding fee.
You can see a complete guide to the VA funding fee, including details on who is exempt, here.
Financing the VA funding fee
Even if you’re not exempt, you don’t necessarily need to come up with cash to cover the VA funding fee at closing.
VA borrowers typically finance the VA funding fee into their VA loan and pay it down over the life of the mortgage.
Save thousands with a VA loan by avoiding PMI
The VA funding fee can look like a lot of money at first glance but for eligible borrowers, this one-time fee buys you access to a loan program that can save you thousands — maybe tens of thousands — of dollars over the life of your mortgage.
VA loans allow you to avoid expensive mortgage insurance. It’s a frequently overlooked but key benefit of this loan program, one that could prove valuable for years to come.