How Avoiding Mortgage Insurance Helps VA Loan Homebuyers
Posted on: January 6, 2017
VA home loans offer zero down payments, competitive interest rates, easier qualification, and many other benefits. Another very important advantages is that VA borrowers don’t have to pay private mortgage insurance (PMI).
Other loans such as FHA and conventional loans, require either large down payments or private mortgage insurance.
Down payments may amount to 20 percent of the purchase price. That could mean borrowers must come up with tens of thousands of dollars in cash to get a loan.
VA borrowers, on the other hand, can get a PMI-free loan with zero down payment.
Plus, with a VA cash-out loan, a veteran can replace an FHA or conventional loan with mortgage insurance with a zero-PMI VA loan.
VA Loans Don’t Require Expensive Mortgage Insurance
FHA and conventional lenders may also make loans without big down payments. However, if they do, they generally require mortgage insurance.
Mortgage insurance is for the lender’s protection. If the borrower is unable to pay back the loan, the mortgage insurance policy will pay the lender part of the outstanding loan balance.
When lenders have mortgage insurance protection, they can make home loans at lower interest rates and to more borrowers than otherwise.
The downside of mortgage insurance from the borrower’s perspective is that the borrower pays for it.
Mortgage insurance may be paid for as an upfront one-time premium collected at closing or as a monthly premium or both.
The upfront premium on an FHA loan can amount to thousands of dollars.
Borrowers may have the option of adding the premium amount to the loan balance. Of course, this will increase the amount of the monthly payment.
The monthly mortgage insurance premium is tacked onto the borrower’s regular ongoing mortgage payment. It has to be paid every month.
After the borrower has been making payments for a while and paid off part of the loan balance, a conventional loan lender may allow the borrower to drop the mortgage insurance and stop making the monthly premium payment.
This can happen when the loan balance reaches 80 percent or less of the property value.
However, not all loans allow for mortgage insurance to be removed after part of the principal is paid off. FHA, for instance, requires mortgage insurance to be paid for the life of the loan in most cases.
That could mean hundreds of dollars a month more in costs for up to 30 years.
The Veteran Loan Advantage
Clearly, not having to pay mortgage insurance can save VA borrowers significant amounts of money upfront and over time.
Lenders are able to make VA home loans without mortgage insurance because VA partially guarantees the loans.
Thanks to this guarantee, the lender knows that if the borrower is unable to pay the loan, VA will step in and reimburse the lender for losses incurred.
To keep the VA guarantee program financially sound, most borrowers pay a funding fee. The fees go to the VA to support the loan program and make sure it will be available to future borrowers.
These VA funding fees usually amount to a few percent of the purchase price. The exact amount depends on how many times the borrower has used the VA loan program and other factors.
Disabled veterans, however, may be completely exempt from paying any funding fees on VA loans.
In any event, VA funding fees are generally less than the amount of a down payment that would be required with an FHA or commercial loan. And, the funding fee can be financed into the VA loan amount.
VA Loans Save Veterans “Billions”
According to the VA, not having to pay mortgage insurance saves VA borrowers billions of dollars collectively every year.
VA borrowers have the best of both worlds. Because VA partially guarantees their loans, veteran borrowers get better interest rates, down payments as low as zero and no mortgage insurance.
The combination of benefits offered by VA loans makes them a natural first choice for any eligible military veteran or active service member.
To find out whether you are eligible for a VA loan and check today’s market rates, contact your mortgage lender.