A Closer Look at a Key VA Loan Benefit: Avoiding PMI

Home loans guaranteed by the Veterans Administration (VA) offer outstanding financial benefits to qualified veterans and service members. Private lenders provide VA loans, but the VA guarantees a major portion of the loans that enable applicants to receive highly favorable terms. One of the greatest benefits is the elimination of down-payment requirements for loans up to $417,000 in most regions of the nation. A major VA loan benefit that can go unnoticed by first-time qualified borrowers is the elimination of private mortgage insurance, saving veterans thousands of dollars every year.

The VA helps to contain closing costs in eliminating the minimum 3.5 percent down payment required for traditional FHA loan. At the same time, the VA guarantees allow lenders to remove the requirements for PMI normally assessed to conventional, non-VA borrowers or the mortgage insurance premiums (MIP) charged on FHA loans for consumers who cannot make a 20 percent down payment. According to Veterans United, a national total of at least $19 billion in PMI costs will be recouped by veterans over the course of VA loans secured as recently as 2012.

Avoiding PMI in a VA Home Loan

According to the VA, guaranteed home loan underwriting provisions establish no minimum loan requirements, no maximum debt ratios, no minimum credit scores, no PMI requirements, and no maximum amounts up to the guaranteed total. PMI and MIP requirements for non-VA loans can include both up-front and monthly payments.

To get a better idea of savings in eliminating PMI requirements for veterans, look at what mortgage insurance costs most conventional borrowers. Traditionally, conventional borrowers with low credit scores or low down payments will pay more for PMI. Monthly premiums without additional risk on a $300,000 loan can run up to $150 a month or more, in addition to the loan payment. Lenders typically will not cancel PMI on a conventional loan until the borrower has built up equity to at least 20 percent of the current market value of the home.

VA Home Loan Rates Vary: Search Competitive Offers

The interest rates on VA home loans rise and fall just as those on conventional mortgages do. Rates are influenced by a number of factors, including the type of loan, the amount borrowed, and down-payments or points purchased by the borrower to "buy down" their rate. Naturally, lenders offer different rates, and veterans can save a median $2,664 on their loans just by getting more than one competitive bid.

VA loan programs help vets get funds for purchasing, refinancing, building, or renovating existing homes. Improvements may include adding energy saving appliances, windows, or other treatments. Qualified vets can also apply for VA mortgage refinance loans and VA Streamline Refinance (IRRRL) loans for vets who want a lower interest rate on their first VA loan without incurring out-of-pocket costs. LendingTree explains the application process for VA loans and eligibility requirements.

Take note: Even without the PMI, VA borrowers will still face fees of 2.15 percent on first-time home loans and 3.3 percent for a second loan. They can reduce fees to 1.25 percent by making a 10-percent down payment. Fees are excused for veterans receiving disability compensation.

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