Do You Need Private Mortgage Insurance With A VA Loan?

Getting a mortgage to buy a home is a big financial decision. And when you’re shopping for a home loan one key question buyers have is whether they’ll need to pay private mortgage insurance (PMI).

So do VA loans require PMI? The short answer is no VA loans do not have PMI or any other type of monthly mortgage insurance This unique perk sets VA loans apart from other popular mortgage options like FHA and conventional loans,

In this article, we’ll dive into the details on PMI and VA loans. We’ll look at:

• What is PMI?
• Pros and cons of avoiding PMI with a VA loan
• What types of loans require PMI?
• Who is exempt from paying PMI?
• How much does PMI cost?
• Alternatives to PMI if you don’t qualify for a VA loan

What Is Private Mortgage Insurance (PMI)?

Private mortgage insurance is an additional insurance policy you pay for if your down payment is less than 20% of the purchase price. PMI protects the lender in case you default on the loan.

With PMI, you pay a monthly premium along with your regular mortgage payment. The PMI premium is typically 0.25% to 2% of the total loan amount per year. On a $200,000 loan, PMI could cost $400 to $4,000 per year.

PMI stays in place until you build 20% equity in the home through your down payment and through paying down the loan balance. Once you hit 20% equity, you can request to have PMI cancelled.

The Pros Of Avoiding PMI With A VA Loan

VA loans offer significant savings by not requiring private mortgage insurance. Here are some of the key pros of avoiding PMI with a VA loan:

Saves money – With a VA loan, 100% of your payment goes toward paying interest, principal, taxes and insurance. You avoid PMI premiums, which saves $30 to $333 per month.

** Allows smaller down payments** – On conventional loans, PMI lets you put down less than 20%. But even 5% down still requires PMI. With a VA loan, you can put 0% down without PMI.

Builds equity faster – More of your payment goes toward principal with a VA loan, helping you build equity and get rid of PMI faster if you later refinance to a conventional loan.

Easier to qualify – Avoiding PMI improves your debt-to-income ratio. And with no required down payment, it’s easier to get approved with less cash.

Lock in low rates – VA loan rates are very competitive, often lower than rates for conventional loans. No PMI helps you lock in a lower rate and payment.

Shorter loan term – You can get a shorter 15 or 20 year term without PMI padding your payment. This saves on interest costs over the life of the loan.

Buy sooner – Without PMI or a required down payment, you can buy with less cash saved up. This allows military families to buy as soon as they get orders for a permanent change of station (PCS).

What Types Of Loans Require PMI?

To understand why VA loans are unique, it helps to know which popular mortgage programs do require PMI or ongoing mortgage insurance:

Conventional loans – PMI is required on conventional loans when the down payment is less than 20% of the purchase price. Borrowers have to pay the monthly PMI premium until reaching 20% equity in the home.

FHA loans – FHA loans charge an upfront mortgage insurance premium (MIP) at closing of 1.75% of the loan amount. Plus an annual MIP of 0.45% to 1.05% of the loan amount. The annual MIP typically continues for the life of the FHA loan.

USDA loans – USDA mortgages also include an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35% – 1.00% of the loan balance. The annual fee lasts the life of the loan.

Jumbo loans – On jumbo mortgages above conforming limits, lenders may require PMI even with a 20% down payment. Jumbo loan PMI typically lasts for at least 5 years.

Who’s Exempt From Paying PMI?

Certain borrowers can avoid paying PMI on conventional loans. These PMI exemptions include:

• 20% down payment – Putting down 20% or more of the purchase price exempts you from PMI. But saving up 20% can take years for most buyers.

• Piggyback loan – Combining a first mortgage with a simultaneous second mortgage for the down payment avoids PMI. But it means paying closing costs and interest on two loans.

• Home equity – If you already have 20% equity from an existing home you’re selling, you can avoid PMI by putting proceeds from the home sale toward the down payment. But most buyers don’t have equity to leverage.

• Mortgage insurance refunds – Some lenders offer lender-paid mortgage insurance with higher rates, then give refunds at closing to pay for part of the upfront PMI premium. This eliminates monthly PMI payments.

As you can see, PMI exemptions only apply to certain scenarios. VA loan eligibility is much broader, so more buyers can avoid PMI.

How Much Does PMI Cost On A Loan?

Private mortgage insurance rates vary between lenders and depend on your credit score, down payment percentage, and other factors. Here are rough estimates for how much PMI costs:

Upfront PMI premium – On conventional loans, you’ll pay an upfront PMI premium of 0.5% – 2% of the loan amount at closing if your down payment is less than 20%. On a $200,000 loan that’s $1,000 – $4,000.

Monthly PMI premium – The monthly PMI premium on a conventional loan typically ranges from 0.25% – 2% of the original loan balance. On a $200,000 mortgage, that comes out to $41 – $333 per month.

At least 5 years – On conventional loans, you have to pay the monthly PMI premium for at least 2 years if putting 10% down, and 5 years with less than 10% down. After that you can request cancellation once you reach 20% equity.

Until 78% LTV – PMI automatically terminates on conventional loans once equity reaches 78% loan-to-value (LTV) based on the original value. This typically takes 8-10 years.

Lifetime PMI – If you only put down 5% or less and have a low credit score below 720, lenders may charge lifetime PMI that never goes away on a conventional loan.

Clearly, PMI adds substantial costs over the long run. A VA loan provides big savings by eliminating PMI and monthly mortgage insurance payments.

PMI Alternatives If You Don’t Qualify For A VA Loan

VA loans are only available to qualified Veterans, active duty military, and surviving spouses. If you don’t qualify for a VA loan, here are some alternative options to avoid PMI:

FHA mortgage – FHA loans require upfront and annual mortgage insurance. But the 1.75% upfront cost can potentially be more affordable than monthly PMI.

USDA loan – Like FHA, USDA mortgages have an upfront guarantee fee you can finance into the loan and lower annual fees. Could be an option in designated rural areas.

Piggyback HELOC – A piggyback HELOC acts as a second mortgage to cover your down payment, avoiding PMI on the main first mortgage.

Family gift – If parents or family can gift you money for a 20% down payment, a conventional loan with no PMI may work. No PMI, but the gift could have tax implications.

State housing programs – Check if your state has special first-time buyer programs with discounted PMI or alternative mortgage insurance options. Funding is limited.

Lender-paid PMI – Some lenders offer programs where they pay closing costs or PMI upfront in exchange for a slightly higher rate, eliminating monthly PMI.

Buydown mortgage – Pay discount points to buy your rate down. This reduces monthly PMI premiums but adds costs upfront.

If you qualify for a VA home loan, going with a VA mortgage is typically the most affordable and easiest route to avoid PMI and monthly mortgage insurance costs.

The Bottom Line

VA loans offer a way out of paying expensive PMI premiums for the life of your mortgage. This saves $30 to $333 per month compared to a conventional loan with PMI.

No mortgage insurance is just one reason VA loans are a prime home financing option for eligible Veterans and military buyers. Be sure to weigh the pros and cons and compare total costs when choosing between VA, conventional, FHA, or USDA mortgages.

Using a VA loan for your next home purchase lets you maximize the benefits you