If there’s one benefit to focus on with VA loans, it’s the fact that you won’t pay PMI. That alone could save you hundreds of dollars each month and thousands of dollars over the life of the loan. The lack of PMI is even more shocking when you think about the fact that you don’t need a down payment. So you can borrow 100% of your home’s price and not pay any extra fees, with the exception of the VA funding fee, which most veterans pay upfront on their loan.
Why Doesn’t the VA Require PMI?
It would seem like a no-brainer. You borrow 100% of the purchase price of the home, so you pay PMI. This way the lender is protected should you default on the loan. At least that’s the case for conventional loans and even FHA loans. Borrowers pay the insurance premiums to protect the lender should they default.
The VA doesn’t require mortgage insurance. But they still guarantee the loans for lenders. In fact, the VA guarantees as much as 25% of the loan balance. That’s much more than most borrowers would put down on a home in the first place, so it actually puts the lender in a good spot. Of course, no lender wants you to default on your loan. They would rather you paid it on time, giving the lender the interest on the money you borrow.
What’s the Funding Fee?
The VA funding fee is not mortgage insurance. FHA loans, for example, charge an upfront mortgage insurance premium plus an annual mortgage insurance premium. VA loans, though, charge a funding fee. The money they collect goes into a reserve account. The VA uses these funds should they have to bail a lender out after a borrower forecloses on their home.
Keep in mind, you will never get the funding fee back. You pay it at the closing (or wrap it into your loan) and that’s it. If you sell the home or refinance, you don’t get any type of refund on this fee. In fact, if you take out another VA loan on the same property, such as happens with a refinance, you will pay the funding fee all over again.
The funding fee itself is rather low compared to what you would pay if you were to pay PMI. Members of the regular military usually pay 2.15% of the loan amount. If you borrow $200,000, that means $4,300. Members of the Reserves or National Guard pay 2.4%, so they pay a little more, but it’s still often less than PMI would cost in the long run.
Other Benefits of the VA Loan
Of course, the lack of PMI is a large benefit, but it’s not the only benefit veterans stand to gain. They can also enjoy the following benefits:
- No down payment
- No minimum credit score requirements (some lenders may require a certain score though)
- No debt ratio requirements (some lenders may impose their own requirements)
- Flexible underwriting guidelines
Veterans also have the advantage of the VA Interest Rate Reduction Refinance Loan. This program allows veterans with a current VA loan to refinance with little verification. They basically have to verify that they made their mortgage payments on time for the last 12 months and that the refinance benefits them in some way. That’s all you need to secure a lower interest rate or better term on your VA loan. In addition, the funding fee on the VA IRRRL is only 0.5% of the loan amount.
The VA loan is beneficial for veterans that qualify. The lack of PMI is one of the largest benefits you will receive, aside from the no down payment requirement. It’s a great way to get yourself started in homeownership even before you have the money saved to put down on a home.