Avoiding PMI with a VA Loan FAQ
Private mortgage insurance (PMI) helps home buyers purchase homes with less than 20% down. But despite its benefits, some home buyers aim to avoid PMI at all costs.
PMI, of course, is private mortgage insurance. It's the monthly premium you pay if you can't put at least 20 percent down on a home purchase or have at least 20 percent equity in a refinance.
What is a VA loan?
A VA loan is guaranteed by the U.S. Department of Veterans Affairs. The loan itself isn’t actually made by the government, but the fact that it’s backed by a government agency makes lenders feel more comfortable offering these loans, because they take on less risk than with a conventional mortgage.
As a result, it’s possible to get a VA loan without a down payment, and — sometimes — with looser credit standards. While you still need to meet certain requirements, and the lender still needs to approve you, if you qualify for a VA loan, it can help you attain homeownership with less money than you’d need in the bank otherwise.
How VA Home Loans Work?
If you are not familiar with the VA loan program, you should know that this type of mortgage is offered to qualifying service members and their families. It is not available to all consumers and requires a minimum time in service to qualify (except for certain surviving spouses of military members who have died).
VA mortgages are a military benefit, but access to the VA loan program does not guarantee loan approval. All applicants must financially qualify the same as for any mortgage loan transaction. VA loans allow the borrower to apply for a no money down mortgage in most cases, and the zero percent down option is a big incentive for many first-time home buyers.
The Home Buying Process
Those eligible for VA mortgages will plan their home loan, apply to get pre-qualified for a home loan, go house hunting, find a house they want to buy (or build), make an offer, and formally apply for the loan. The lender will review the application information, order an appraisal, and establish a closing date.
For VA mortgages, there are closing costs to be paid on that date, but not a conventional loan mortgage insurance premium or an FHA Up-Front Mortgage Insurance Premium.
Why Mortgage Insurance?
A mortgage insurance requirement is a form of protection for the lender. Your loan officer needs a guarantee that the loan will not wind up costing the lender money; mortgage insurance is one way to do that.
With VA loans, the federal government backs a certain portion of the loan amount, protecting the lender against loan default or foreclosure. Mortgage insurance is for the lender and not the borrower, but VA loan guarantees don’t require insurance due to the specialized nature of the loan and who it is intended for.
There are government-backed mortgages that require a mortgage insurance premium (not private mortgage insurance), but not VA loans.
How To Avoid Private Mortgage Insurance On Your Home Loan?
There are few ways to avoid having to pay private mortgage insurance, commonly known as PMI, on your home loan. One way is to buy house using a conventional mortgage loan and pay 20% down or better. Twenty percent down means starting off with 20% equity in your home, and NO private mortgage insurance in most cases.
Borrowers who make large down payments but have poor credit scores may find their down payment requirements or other compensating factors for loan approval are adjusted to meet their specific circumstances.
Another way is to apply for an FHA mortgage. These home loans do NOT require private mortgage insurance, but they DO require a mortgage insurance premium.
While you are not paying for a privately operated mortgage insurance program, you are still paying for the insurance for either 11 years or the lifetime of the mortgage depending on the term of the loan, the size of your down payment, and other variables.
The VA Home Loan Alternative: No PMI
Then there are VA mortgages, which require neither the mortgage insurance premiums needed for FHA mortgages, nor private mortgage insurance (PMI). VA mortgages are a huge advantage to qualified borrowers because of this.
What is a VA Funding Fee and How Much Does It Cost?
While you don’t have to worry about PMI, you do have to pay a VA funding fee. Your VA funding fee depends on the size of your VA loan down payment, and whether it’s your first-time use of the benefit.
|Down payment||First-time use||Subsequent use|
|5% – 10%||1.65%||1.65%|
|10% or more||1.40%||1.40%|
Talk to a Professional
While we have outlined seemingly simple strategies to put down less than 20% and avoid private mortgage insurance, many factors impact your financing. Be sure to talk to a knowledgeable mortgage analyst before making any decisions in regards to a mortgage.