Tips & Special Topics
VA Loans and Private Mortgage Insurance
Added April 22, 2010 | Updated April 22, 2010
Private Mortgage Insurance (PMI) is typically paid to insure mortgages with more than an 80% loan-to-value ratio. The purpose of the insurance is to offset lender losses in case a borrower is unable to repay the loan and the lender is not able to recover costs after foreclosure and the sale of the property. A typical PMI premium on a $200,000 property might be around $120 a month ($1440 per year). Unless a borrower is able to make a twenty percent down payment on a home purchase, PMI is required in most instances. VA loans are an exception; they do not require mortgage insurance.
Understanding PMI can help VA borrowers realize the money saved with the no PMI benefit of veterans’ mortgages. Because the U.S. Department of Veterans Affairs guarantees a portion of every VA mortgage, PMI is not required from VA borrowers. The savings can add up to thousands over the life of the loan.
For most other borrowers, PMI is a reality. Some borrowers end up paying PMI even after the principal balance is paid down below 80%. The request to cancel PMI must come from the servicer of the mortgage. Many times, to ensure the 80% requirement has been met, the servicer will require an appraisal (a cost that can run from $300 to $450), or that the balance be paid down to 75-78 % of the original loan amount. VA-eligible borrowers can avoid all this by using their VA home loan benefits.
Unless it’s a VA loan, borrowers should be informed about loans marketed as no-PMI loans. What many borrowers don’t realize is that loans advertised as “no PMI required” may be lender-paid PMI loans with higher interest rates. Therefore, the borrower may end up paying for the PMI indirectly through higher monthly mortgage payments.
Some non-VA borrowers can get around the PMI requirement by using a second mortgage often referred to as a piggyback second. A second mortgage may be used, in some cases, to compensate when a borrower has less than twenty percent to put down. For example, an 80/10/10 program uses a ten percent LTV second mortgage with a ten percent down payment. An 80/15/5 program uses a 15 percent LTV second mortgage with a 5% down payment. Interest rates on second mortgages, however, are often higher than those for first mortgages. This type of home financing has lost favor with many first and second mortgage lenders.
No PMI is just one of the many advantages the VA home loan program has to offer. Some other benefits of VA loans include:
• No down payment required
• Relaxed qualifying standards
• Competitive interest rates
• No prepayment penalties
VA loans are a benefit of qualified service in the U.S. military. Eligibility standards are set by the VA and a Certificate of Eligibility is required as proof of entitlement. To learn more about no-PMI VA mortgages and the VA home loan guaranty program, contact a VA loan professional.
