VA Loan PMI | Do VA Loans Require Mortgage Insurance?
Last Updated on March 3, 2023 by Luke Feldbrugge
The VA loan PMI benefit is one of the money-saving advantages of working with the VA loan system on your mortgage. PMI is private mortgage insurance, and new home buyers often need to pay this on a monthly basis. With the VA, you don’t. It might not look like much at first compared to the “no down payment” part of the VA’s benefit, but it can add up to thousands of dollars in savings over the life of your loan.
Let’s take a quick look at both the Veterans Administration loan program and private mortgage insurance.
Intro to the VA Mortgage Program: Do VA loans have PMI?
The first thing to remember is that the VA does not give you the loan or mortgage. Their role is to guarantee and insure the loan. The real money comes from a VA-approved private mortgage lender or broker. When the VA insures your loan, they are telling the private lender that you are good for it. If you can’t make the payments, the VA mortgage insurance will make sure the private lender gets paid (up to a certain amount). You can probably see how you don’t need private mortgage insurance because if you are eligible for the VA loan guarantee, you essentially already have mortgage insurance (public).
The benefits of the VA loan guarantee make a long list, but the Big Three Benefits that always get mentioned are:
- No Down Payment
- No PMI
- Low Interest Rates
There are a lot more, of course, but those are the big ticket items that save you, if you are eligible, a lot of money up front and over the life of your mortgage. But if you are wondering “do VA loans require mortgage insurance?”, the answer is no.
The VA loan program is designed to help military personnel and veterans find and afford new homes. They can help you at many stages of the home ownership journey, because helping you find a great home within your budget is an acknowledgement of your sacrifices – and that can make a significant difference in your life.
The military VA Home Loan program was established as part of the GI Bill right after World War II. It saw its 75th birthday in 2019, and it is still one of the most popular benefits offered to active duty military members and eligible veterans. VA loans have helped more than 25 million veterans and active duty military service members since it began, and it helped 1.2 million heroes in 2020 alone.
It is overseen by the U.S. Department of Veterans Affairs.
Together VA loan benefits will save you thousands or tens of thousands of dollars. There is a longer list of benefits that includes things like the fact that you can use VA loans over and over again throughout your lifetime. It is also extended to the surviving spouses of service members who have passed.
If you are still on the fence, you should also know that there are four different VA loan types in the system that can help you purchase a home – but also refinance it further down the line. The suite of loans packages from the VA are:
Purchase: This is the main VA loan that will help you get a mortgage to buy a home.
VA IRRRL: The VA Interest Rate Reduction Refinance Loan is a refinance loan you can use to reduce the interest you pay on your mortgage. If you can successfully refinance, it can reduce your monthly payment in the short term, AND your overall mortgage payments in the long term. This option is only open to those who already have a VA mortgage.
VA Cash Out Refinance: This is another refinance option from the VA, but this lets you refinance your mortgage and turn the equity you’ve developed in the property into cash. You can use this cash to repair your home, renovate it, install energy efficient elements, pursue your education and take care of emergencies (for example, medical bills).
Native American Direct Loan: If you’re a veteran, and either you or your spouse is Native American, you could be eligible for the NADL. These loans let military veterans and active-duty service members buy, build or improve a property on federal trust land.
Being able to skip the PMI is a big deal. Veterans and active duty service personnel who used the VA loan in 2021 will save more than $40 billion in private mortgage costs over the life of their loans.
PMI and Why You Pay It (Sometimes)
PMI is insurance, and even though you pay for it, it really only protects the lender. If you can’t make payments, the insurance makes sure your lender doesn’t lose the money they’ve given you. It’s that simple, and it’s typically something you pay if you are a first-time home buyer without much–or any–down payment.
If you have a down payment–say 20%–your lender shouldn’t need to have any PMI. Likewise, you won’t be paying it forever. Once you make a few years of mortgage payments and build up some equity in your house, the PMI isn’t necessary anymore.
Nevertheless, PMI can take a bite out of your budget when you go with a conventional home loan. Monthly payments can average between $100 and $300 a month. Being able to bypass that through the VA is a great deal.
This VA loan mortgage insurance is also rather unique in terms of loan programs from the federal government. With other mortgage programs such as USDA loans or FHA (Federal Housing Administration) loans, you still have to pay PMI. Only the VA covers it as a way to make home ownership more available to military service members and eligible veterans.
VA Funding Fee
While there are a lot of ways to save money through the VA loan process, there is one cost to look out for. The VA Funding Fee is something you pay each time you get your loan guaranteed or insured by the VA system. The one-time fee helps fund the system, but it’s not a small amount. For the first time you use it, it’s only 2.3% of the total loan. The second time you use it, it is 3.6%, and that’s what it will be for the rest of the time you are applying to get a VA loan guarantee. You can, however, fold the fee into the loan and pay it off over time (as long as you don’t push the total over your entitlement).
One way to look at the funding fee is that, instead of paying your PMI every month for years, you only need to pay this funding fee once.
There are some exceptions, that is, veterans who do not have to pay the funding fee.
- Veterans who receive compensation for a service-related disability
- Veterans eligible for service-connected disability pay but receiving retirement or active duty pay instead
- Surviving spouses of a veteran who died in service or from a service-related disability.
- Active military members who have been awarded the Purple Heart.
- Veterans who have a memorandum rating saying you are eligible for compensation based on pre-discharge claim.
Entitlement: Do You Pay PMI on a VA Loan if You Go Over?
First off, you won’t be paying a PMI even if you exceed your entitlement. So if you want to skip this section, you can.
Nevertheless, VA loan entitlement can come up in any discussion of your benefits because it’s fundamental to what you can expect from the organization. The VA Certificate of Eligibility is the one of the first things you will encounter when you start the VA loan process. The COE is what it sounds like: it verifies to the VA loan officers that you are, in fact, eligible for the program.
The COE also lists your VA benefits entitlement, meaning it tells you how much of a loan they will insure. For example, if you have the full VA entitlement– $647,000 – your mortgage loan can’t be over that amount to stay within your entitlement. If you go over that – for a house that costs more than that – you start to owe down payments on the extra amount. There is no loan limit on VA loans, just a limit to what they will insure (i.e. your entitlement).
Just because you may owe a down payment when you go over your entitlement, you still won’t need PMI. Even with what the VA calls a Jumbo Loan, a significant portion of that loan is still covered by the VA loan guarantee, so the PMI isn’t necessary.
Homes for Heroes can Save You Money in the Process
Navigating the VA loan system – the VA loan PMI benefit and other rules – can be complicated and intimidating. You will be working with both a federal government agency and a private VA home loan lender or bank. We can help with that second part.
We provide a team of experts to get you from the beginning of the search all the way to closing.
Homes for Heroes wants to help heroes at all stages of the home buying journey. First, we connect you with our local real estate and mortgage specialist, who are instrumental to the VA home loan process. Our mortgage specialist helps you navigate the VA loan system because they are committed to assisting military members with their mortgage and home loan needs.
“This program is absolutely incredible and the men and women who benefit are even more amazing. To our real estate agent, thank you for changing our lives with this program! You will always be our hero!” – Glenn, Army, bought a house in Washington.
If you end up purchasing a house with our local specialists, after closing you receive a check at the end of the home purchase journey as part of our thank you. That Hero Rewards savings check averages about $3,000. It’s all done as our way of saying thank you for your military service.