VA loans: No mortgage insurance required
Looking for a 100% loan. The VA loan may be your answer.
Many VA borrowers say that buying a home with no money down is the VA program’s biggest advantage. But there are other characteristics of a VA mortgage that provide huge benefits as well, especially compared to other available financing options.
With VA loans, closing costs are often lower, there’s less stringent underwriting, and mortgage rates are extremely competitive.
Another big advantage of VA loans that’s often overlooked is the absence of a monthly mortgage insurance payment.
Let’s take a closer look.Verify your VA loan eligibility (Jul 9th, 2020)
Mortgage insurance basics, by loan type
Mortgage insurance typically comes into play when borrowers have a loan-to-value of 80 percent or higher. This form of insurance gives lenders the confidence and flexibility to lend to buyers with less skin in the game.
Borrowers pay the premium and in return are allowed to put less down. The premiums can be one-time charges, paid monthly or both in the instance of FHA and USDA loans.
Conventional mortgage insurance
Conventional loans require a minimum 3 percent down payment. Consumers unable to put down at least 20 percent will usually have to contend with private mortgage insurance (PMI).
PMI rates on conventional loans will vary depending on several factors, like your credit score, your down payment, the loan amount and others.
Conventional PMI is typically anywhere from 0.5 percent to 1 percent of the loan amount, and paid as part of your monthly mortgage payment.
For example, on a $200,000 loan, that’s anywhere from $1,000 to $2,000 in annual PMI costs. Given that range, you could be adding anywhere from $83 to $167 to your mortgage payment each month.
Conventional borrowers typically pay PMI until they establish their loan-to-value ratio reaches 80 percent.
Remember that PMI is neither good nor bad.
FHA mortgage insurance
FHA loans require a minimum 3.5 percent down payment and the program collects both an upfront mortgage insurance premium as well as an annual premium.
The upfront portion is added to your loan balance, while the annual fee is typically spread across your monthly mortgage payments.
FHA mortgage insurance premiums (FHA MIP) are subject to change.
The upfront fee is currently 1.75 percent of the loan amount. For FHA borrowers making that minimum down payment, since January 2015, the annual mortgage insurance premium is 0.85 percent.
Using that same $200,000 loan example, the upfront MIP would be $3,500, which is added to the loan amount for you. The annual MIP fee add approximately $142 to each of your monthly mortgage payments.
FHA borrowers can consider refinancing away from the FHA once they’ve established 10 percent equity in their home. In many U.S. cities, this is already possible given that home values have climbed more than ten percent in the last few years.
USDA mortgage insurance
The USDA Rural Development program is the other government-backed loan option offering 100 percent financing. This unique loan option can be used to purchase or refinance properties in qualified rural areas.
Like FHA loans, USDA loans feature both an upfront and an annual mortgage insurance charge. The upfront fee of 1.0 percent is added to the loan balance. The annual MIP fee is currently 0.35 percent.
On a $200,000 loan, the upfront MIP charge would be $2,000. The annual MIP on a USDA loan would add about $58 to your monthly mortgage payment.
VA mortgage insurance
Qualified VA borrowers in most parts of the country can purchase a home of any price with zero down, since VA loan limits have been repealed as of January 1, 2020.
Regardless of the loan amount, one thing they won’t have to factor in is mortgage insurance.
For a VA buyer looking at a $200,000 purchase price, the benefit of “not paying mortgage insurance” can bolster buying power, and, as compared to a comparable FHA loan, save a buyer as much as $142 per month in extra costs.
VA loans do come with a one-time funding fee which most borrowers choose to add to their borrowed loan amount. The funding fee cost for most first-time VA buyers is 2.3 percent of the loan size, which amounts to $4,600 on a $200,000 loan.
Borrowers with a service-connected disability are exempt from paying the funding fee entirely.
What are today’s mortgage rates?
Today’s mortgage rates are low, and for borrowers with VA-backed loans, rates are even lower. This, plus the VA’s “no mortgage insurance” policy makes the VA loan worthy of consideration.Verify your VA loan eligibility (Jul 9th, 2020)