VA loans, offered through the US Department of Veterans Affairs, are uniquely structured to provide advantages for veterans, active-duty service members, and eligible surviving spouses. One of the standout benefits of VA loans is that they do not require private mortgage insurance (PMI)—a cost-saving feature that sets them apart from other conventional and FHA loans.
Read more: How does the 70/40 rule work for Vets? The key guideline your need to understand.
Why VA loans avoid PMI
PMI is commonly required for conventional loans when borrowers put down less than 20% of the home’s purchase price. It is designed to protect lenders against potential borrower defaults. However, VA loans are backed by the Department of Veterans Affairs, providing the guarantee lenders need without requiring borrowers to pay for PMI. This results in significant monthly savings for VA loan recipients.
For example, PMI on a conventional loan can range between 0.5% and 2% of the loan amount annually, potentially adding $100–$200 or more to monthly payments for many homeowners. Eliminating this requirement with VA loans helps make homeownership more accessible and affordable for veterans and military families.
The VA funding fee
While VA loans eliminate PMI, borrowers are typically required to pay a VA funding fee. This one-time fee helps sustain the VA loan program for future generations. As of April 2023, the funding fee for first-time borrowers with no down payment is 2.15% of the loan amount, although the fee can range from 0.5% to 3.3%, depending on factors such as loan use and down payment size.
For example, a borrower purchasing a $200,000 home with no down payment would incur a funding fee of $4,300 (2.15% of the loan amount). Borrowers can either pay this fee upfront or roll it into their loan, which increases the total loan balance.
Certain groups are exempt from paying the VA funding fee, including:
- Veterans receiving VA compensation for service-connected disabilities.
- Active-duty service members are awarded a Purple Heart.
- Surviving spouses of veterans receiving Dependency and Indemnity Compensation (DIC).
This fee supports the broader goal of enabling VA loans to remain PMI-free, directly benefiting millions of veterans and their families.
Benefits of VA loans beyond no PMI
VA loans offer several additional benefits, making them an attractive option for eligible borrowers:
- No down payment: Qualified borrowers can purchase a home with $0 down, regardless of the property’s price.
- Lower interest rates: VA loans often feature competitive interest rates compared to conventional mortgages.
- Flexible credit requirements: Unlike most loan options, VA loans do not impose strict credit score minimums.
- Limited closing costs: The VA caps allowable closing costs, providing further savings for borrowers.
- Comparing PMI costs for conventional loans
For context, conventional loans with PMI can become costly over time. A $300,000 home purchase with a 5% down payment could incur an annual PMI cost of $1,500–$3,000 until the borrower builds 20% equity. FHA loans similarly charge annual mortgage insurance premiums (MIP) alongside an upfront fee of 1.75%, making VA loans a consistently more affordable option.
VA loan eligibility
Veterans and service members must meet basic time-in-service and character of service requirements to be eligible for a VA home loan. Some surviving spouses also have VA loan eligibility.
Active duty service members, Veterans, and those serving in the National Guard and Reserves can all be eligible, along with select other groups.
Generally, you can be eligible for a VA loan if you served:
- 90 consecutive days on active duty (wartime)
- 181 consecutive days on active duty (peacetime)
- 6 years in the Guard or Reserve, or 90 days under Title 32 orders (at least 30 of those days must be served consecutively)
Lenders like Veterans United can help obtain your Certificate of Eligibility (COE), a formal document issued by the VA that confirms you meet the guidelines. Veterans don’t need to get this document before starting the home loan process.
