It’s true: Veterans who purchase a home with a VA loan are not required to carry private mortgage insurance (PMI). PMI is otherwise required of all borrowers paying less than 20% down; it can be very expensive, typically to the tune of thousands of dollars per year. But when veterans take advantage of their VA home loan privilege, the costly concern of PMI can be eliminated.
Why VA Loans Don’t Require Mortgage Insurance
VA loan borrowers are not required to carry PMI mortgage insurance because their loans are guaranteed by the U.S. Department of Veterans Affairs. “Guarantee” means that the government is absorbing the risk that would normally be assumed by the lender when the borrower makes a low down payment. Of course, VA loan borrowers pay no down payment at all; however, their VA guaranteed loan eliminates the need for PMI nonetheless.
What VA Loan Borrowers Pay Instead
Instead of paying for this mortgage insurance, VA loan borrowers pay a funding fee that covers the remainder of the risk for the lender. The VA loan funding fee is a one-time fee that is determined by a formula established by the VA. Some important facts about VA loan funding fees include:
- Currently, VA loan funding fees are 2.15% of the total amount of the loan for first time use, and 3.3% for subsequent uses of VA eligibility.
- The funding fee for National Guard and Reserve veterans is slightly higher than it is for other service members; according to the funding fee table on VA.gov, it is currently 2.4%.
- VA loan borrowers must pay the funding fee at the time of closing; however, it is typically financed into the total loan amount.
- For a VA interest rate reduction refinance loan (IRRRL), the funding fee is 0.5% of the total loan amount.
- For VA loans with down payments, the funding fee is also reduced.
It is important to note that these funding fee amounts are based on VA loan transactions where the down payment was from 0 to 5%. At Wholesale Capital Corporation, we can tell VA loan borrowers what their funding fee total is based on the specific calculations of the transaction.
VA Loan Funding Fee Exemptions
Some VA borrowers may be exempt from paying a funding fee. Those borrowers include:
- Veterans who receive VA compensation for a service-connected disability
- Veterans who would be entitled to receive compensation for a service-connected disability if they did not receive retirement or active duty pay
- Surviving spouses of veterans who died in service, or died from a service-connected disability
VA Loan Funding Fees vs. PMI
All home loans with less than 20% equity require the borrower to pay for some form of insurance in order to safeguard the lender from the risk of default. But for VA loan borrowers, the insurance is replaced by a manageable funding fee that is financed into the loan amount. Many VA loan borrowers feel this is a big advantage, because they do not have to pay out-of-pocket upfront or have the obligation of paying for costly mortgage insurance on a monthly basis for years to come.
With PMI, borrowers pay a premium on top of their monthly mortgage payment for several years; some even pay indefinitely. For buyers who are able to eliminate PMI eventually, it comes only after the borrower has paid down the balance of the loan and has a minimum of 20% equity in the home (plus, the appreciation must be approved by the lender). All things considered, many borrowers feel that financing a one-time funding fee is preferable to paying PMI or a monthly mortgage payment.
Getting Started with a VA Loan
If you are a veteran of the United States military and you are interested in buying a home without the requirements of a down payment or costly mortgage insurance, now is a great time to apply for a VA loan. Wholesale Capital Corporation can walk you through the application process in a simple, straightforward manner and provide you with the friendly service you deserve. To learn more, contact us at (855) 640-2020 and ask to speak with a loan officer.
Wholesale Capital Corporation is not affiliated with or acting on behalf of or at the direction of the Federal Housing Administration (FHA), Department of Veterans Affiars (VA) or any government agency/government-sponsored entity. WCC is licensed by the California Bureau of Real Estate, Broker License #01147747 and CA Finance Lender’s License #603K610, NMLS# 9873. Also licensed in Arizona by the Arizona Department of Financial Institutions, MB# 0937346 . Equal housing lender.