Written by Isaac Davis

Many VA borrowers choose VA loans for their zero-money-down and no-private-mortgage-insurance features.  Almost all mortgage programs, except the VA Home Loan Guaranty Program, include private mortgage insurance.  Private mortgage insurance (PMI) is a premium that a lender charges on a mortgage for a home with less than 20% equity.  PMI is intended to offset risk in case a borrower defaults.  A standard monthly premium on a $200,000 mortgage might be $120 (that’s $1440 per year). If a conventional borrower finances more than 80% of the home’s value, he or she can most likely expect to pay monthly PMI premiums for about three to five years until the principal is paid down.  VA loans never require PMI. 

By understanding PMI, VA borrowers can appreciate the savings no-PMI veterans’ mortgages can provide. The reason PMI is not required on VA loans is that the U.S. Department of Veterans Affairs backs a portion of every veterans’ mortgage. The money saved is money VA borrowers can use for things like paying down debts, paying for their kids’ college tuition, taking vacations or simply socking away for future use. 

PMI is a reality for most other mortgage seekers.  What’s more, a lender is not legally obligated to cancel PMI on a mortgage even after it has been paid down to a 78% loan-to-value (LTV) ratio.  In reality a conventional or FHA borrower could be paying PMI long after the principal dips below 80% of a home’s value.  To cancel PMI, the loan servicer must make a request.  Before the request can be made, the servicer will often mandate an appraisal.  Most appraisals cost from $300 to $450.  This is yet another savings VA borrowers get by using the VA loan program. 

Many borrowers can be tempted by lenders advertising no-PMI mortgages.  Unless it is VA mortgages being advertised, borrowers should beware of so-called no-PMI loans.  “No PMI” can often mean that the lender actually pays PMI and charges the borrower a higher interest rate to make up for it. With this type of set up, the borrower ends up paying PMI indirectly through higher monthly mortgage payments.  With VA loans, interest rates are never hiked up to offset lender-paid PMI.

Sometimes conventional borrowers can avoid PMI by using a second mortgage as a piggyback.  A piggyback second mortgage can sometimes make up the difference when a borrower has less than twenty percent down.  In an 80/10/10 situation, a ten percent LTV second mortgage is combined with a ten percent down payment.  In an 80/15/5 situation, a 15 percent LTV second mortgage is combined with a five percent down payment.   The drawback to piggyback seconds is that interest rates on second mortgages are usually higher than the going rate for first mortgages. 

VA loans don’t have any of the drawbacks that come with PMI mortgages.  But, this is just one of the many reasons to favor the VA home loan program.  In addition to no PMI, some other benefits of VA loans include:

• No money down/100% financing
• Less stringent qualifying guidelines set by the VA
• Low interest rates
• No prepayment penalties
• Cash-out and debt consolidation refinance
• Streamline rate reduction refinance

 

For more information about no-PMI VA mortgages and qualifying guidelines for VA home loans, contact a VA-approved loan professional