If you’re new to the world of real estate, you’ll quickly learn that there are many new terms to understand: amortization, equity, principal, private mortgage insurance, etc. When private mortgage insurance (PMI) is discussed, it’s often in the context of avoidance. For obvious reasons, most homebuyers wish to bypass PMI if possible. Because we specialize in loans backed by the Department of Veterans’ Affairs (VA), many homebuyers come to us asking, “Do VA loans have PMI?” They’re typically delighted with the answer.
Do VA Loans Have PMI?
What is private mortgage insurance, and why are homebuyers so eager to avoid it? How can you tell if a loan requires mortgage insurance? Do VA loans have PMI? Learning the answers to these questions will help you understand one of the advantages that make VA loans so appealing.
Defining Private Mortgage Insurance
As Investopedia explains, mortgage insurance is an insurance policy that protects against a default on a home loan. Although the borrower pays for this insurance, these policies are designed to protect lenders. If a borrower fails to meet their mortgage obligations, the payout goes to the lender. The borrower won’t see anything from the policy. That’s why borrowers often do their best to avoid mortgage insurance. It’s an additional expense that adds to the cost of buying a home without providing any direct benefit, and most would prefer to use those funds for other things.
Which Home Loans Require PMI?
How can you tell if a loan will require private mortgage insurance? The Consumer Financial Protection Bureau offers a clear explanation:
- Conventional Loans: If you opt for a conventional loan and make a down payment of less than 20 percent, your lender will likely require you to carry a PMI policy. These policies rarely call for a significant payment at closing. Borrowers normally pay a monthly installment when they make their mortgage payment.
- FHA Loans: All loans from the Federal Housing Administration (FHA) require mortgage insurance, but borrowers technically don’t pay for private mortgage insurance. That’s because they pay a qualified mortgage insurance premium to participate in the FHA’s insurance program instead. With the FHA’s program, borrowers pay an upfront insurance cost at closing as well as a monthly insurance payment with their mortgage payment.
- USDA Loans: When it comes to mortgage insurance, loans guaranteed by the U.S. Department of Agriculture (USDA) have requirements that are very similar to those for FHA loans. Borrowers must use the USDA program’s insurance and pay both at closing and each month. However, USDA mortgage insurance is generally less expensive than FHA mortgage insurance.
VA Loans and Mortgage Insurance
Did you notice that VA loans weren’t on the list? That’s because VA loans do not require any mortgage insurance. The government backing provided by the VA takes the place of a mortgage insurance policy (source). Unless they qualify for an exemption, borrowers using these loans will need to pay a one-time funding fee, but the funds raised via the funding fee are not for insurance. Instead, they’re used to help offset the VA loan program’s operating costs.
Why is it so appealing to bypass private mortgage insurance? Borrowers who don’t have to pay for mortgage insurance can save substantial cash and increase their buying power. VAntage Point, the VA’s official blog, explains the advantages with an example: A borrower using a conventional loan who puts down 5 percent on a $250,000 home is required to pay $150 in PMI each month on top of their monthly mortgage payment. In contrast, a borrower using a VA loan could either save that $150 a month or opt to pay the same amount as a mortgage payment and own a home worth $30,000 more!
Is a VA loan the ideal tool to help you reach your housing goals? Are there other options you should consider? PrimeLending: Manhattan, Kansas, can help you figure that out. We offer an extensive range of home loan and refinancing products, and our team of friendly financial experts has a thorough understanding of all the potential pros and cons. How can we help you? Contact us today to find out.