As a benefit of service, the U.S. Department of Veterans Affairs guarantees home loans for qualifying veterans and active members of the military. These loans are often easier to obtain than traditional financing, thus allowing military personnel more opportunities for home ownership. Although the VA backs these loans, it doesn't require borrowers to pay mortgage insurance.
Not only is mortgage insurance not a requirement for a VA loan, but it is also prohibited. According to Bankrate, the VA doesn't collect any mortgage insurance of its own, and it won't allow lenders to charge a borrower private mortgage insurance on a VA loan. VA regulations prohibit both monthly PMI and upfront PMI, regardless of the borrower's credit score, debt-to-income ratio or other payment history.
Because the VA doesn't collect mortgage insurance, it must cover the cost of insuring VA loans in other ways. For this reason, the VA charges each borrower a funding fee at closing. At the time of publication, the basic funding fee is a one-time payment equal to 2.5 percent of the loan balance. However, this fee may increase or decrease based on the borrower's credit score and the loan-to-value ratio associated with the mortgage.
The VA doesn't require borrowers to pay a funding fee if they meet certain exemption requirements. You may be exempt if your spouse died from a service-connected disability, if your spouse died during active military service or if you are a veteran who qualifies to receive VA disability compensation for a service-connected condition. If you are disabled because of a service-connected condition, you can qualify for a funding fee waiver even if you receive retirement pay instead of VA disability compensation.
If your credit score is high and your loan-to-value ratio is low, your funding fee may be $0 even if you don't qualify for an exemption. For example, if your loan-to-value ratio is less than 60 percent and your credit score is higher than 700, you won't pay a funding fee. The VA allows loans with no downpayment. However, providing no downpayment will raise your loan-to-value ratio, which also raises your funding fee.
- Freddie Mac: Department of Veterans Affairs (VA) Mortgage
- United States Department of Veteran Affairs: Purchase and Cash-Out Refinance Home Loans
- Bankrate.com: Should You Try a VA Home Loan?
- Freddie Mac: Exhibit 19 - Postsettlement Delivery Fees
- United States Department of Veteran Affairs: VA Funding Fee