VA Loans and PMI: Breaking Down Mortgage Insurance and VA Loans

VA loans come with a laundry list of benefits. Purchasing with no money down, capping what borrowers pay in closing costs and incredibly competitive interest rates are just a few of those benefits. However, an often overlooked benefit is how VA loans handle mortgage insurance.

VA Funding Fee vs PMI

While the VA loan does not require mortgage insurance, it does have what’s known as the VA funding fee. Essentially, the VA funding fee is a one-time fee applied to VA loans to help keep the program running for future generations.

The VA funding fee is typically 2.15 percent of the loan amount but ranges between 0.5 and 3.30 percent, and not every Veteran is required to pay it. The VA funding fee can be paid upfront or rolled into the loan amount.

How Other Loan Types Handle PMI

PMI is a staple of conventional home financing. With conventional loans, homeowners who can't bring 20 percent down must typically pay private mortgage insurance.

Private mortgage insurance helps insulate the lender from loss if the borrower defaults. PMI on conventional loans typically ends when the borrower has 20 percent equity in the home - that same 20 percent figure that the lender wanted to see at the outset.

The reality is that a 20-percent down payment is difficult to muster for most homebuyers. For example, the average VA loan was just over $310,000 for all of 2021 - and still climbing in 2022. If a borrower were to purchase a $310,000 home with a conventional loan, they would need to bring $62,000 in cash to meet the threshold for no PMI.

Depending on your purchase price, down payment and other factors, PMI can easily run $150 to $200 per month. The rate for PMI typically ranges from 0.3 - 1.15 percent of the entire loan amount each year.

Loans backed by the Federal Housing Administration (FHA) also require annual mortgage insurance, known as a mortgage insurance premium (MIP). Additionally, FHA loans have a one-time upfront mortgage insurance fee of 1.75% of the loan amount, which is typically rolled into the loan.

Annual mortgage insurance for FHA borrowers ranges from 0.40 to 0.75 percent depending on loan balance and term - though most FHA borrowers pay .55 percent of the loan amount each year.

To put this in perspective, that same $310,000 home would need a minimum 3.5 percent down payment ($10,850), an upfront fee of $5,425 (paid upfront or rolled into the loan) and a $142.08 mortgage insurance premium paid each month for the life of the loan (assuming 3.5 percent down with a 30-year term).

No mortgage insurance is a significant benefit for VA borrowers. If you have any questions, leave them for us below or continue learning about the benefits of the VA loan here with our complete guide to the VA loan.