As we’ve mentioned countless times, the VA home loan program comes with a laundry list of benefits, from purchasing with no money down and caps on what borrowers can pay in closing costs to incredibly competitive interest rates even for those with lackluster credit.
Veterans United also offers the Lighthouse program, which helps veterans improve their credit free of charge.
But there’s another big one that sometimes gets swallowed up in all the talk about purchasing without a down payment: VA borrowers aren’t required to pay private mortgage insurance (PMI) with a VA loan. Avoiding any kind of mortgage insurance saves VA homeowners from forking over thousands of dollars in mortgage insurance during the initial stretch of their mortgage term.
A Look at the Others
Private mortgage insurance is a staple of conventional home financing. Even loans backed by the Federal Housing Administration (FHA) have forms of both one-time and annual mortgage insurance.
In the conventional world, homeowners who can’t muster a 20-percent down payment are typically required to secure private mortgage insurance from a PMI company. This insurance helps insulate the home lender from loss if the borrower defaults. It usually ends when the borrower has 20 percent equity in the home — that same 20 percent figure that lender wanted to see at the outset.
The reality is a 20-percent down payment is difficult to muster for the vast majority of homebuyers. A borrower planning to purchase a $150,000 home would need $30,000 in cash in order to meet that threshold. Depending on your purchase price and down payment and other factors, PMI can easily run $150 to $200 per month. The rate for PMI is generally .3 – 1.15% of the entire loan amount each year.
FHA loans require a minimum down payment of 3.5 percent. Buyers pay an up-front mortgage premium equal to 1 percent of their loan amount. For that $150,000 home, that’s $1,500 due at closing. FHA borrowers also pay an annual mortgage premium that’s a little more than 1 percent of their loan amount, which would be in the neighborhood of $125 for this example loan amount. You’ll pay this annual fee for the life of the mortgage — as much as 30 years.
No PMI Required
VA borrowers don’t have to worry about coming up with a wad of cash to close. In fact, borrowers in some cases can secure a home without spending a dime up front. One thing all VA borrowers have in common is they’re able to save money each month that other homeowners miss, allowing them to pay down debt, cover regular expenses or pay down their principal, which can shave years and thousands of dollars in interest from their mortgage.
Veterans who secured a VA loan last year will save more than $40 billion in private mortgage costs over the life of their loans, according to VA estimates.
The no-down payment mortgage will and should remain the VA Loan Guaranty program’s signature benefit. But it’s important that PMI doesn’t get lost in the shuffle of benefits. Something to remember when the time comes to evaluate your lending options.
You can talk with one of our loan specialist about getting prequalified for a home loan at 855-870-8845. Also remember that VA loan prequalification and preapproval are not binding steps, which allows veterans to compare lenders and make a decision that’s right for them.
We also have more information about the benefits of the VA loan available in our VA Loan Guide.
Photo courtesy USDAgov