VA loans have a large number of benefits including no down payment requirements. But one of the largest benefits they have is the lack of mortgage insurance required. Borrowers don’t have to pay any mortgage insurance both upfront and during the life of the loan. This is all without making any sort of down payment on the home too.
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What’s even more surprising is that the VA has some of the lowest default rates in the mortgage industry. This is part of the reason they don’t need mortgage insurance, but below we discuss even more reasons why you don’t have to pay it.
The VA Guarantees Loans
The VA plays a role in your VA loan even though you won’t see or talk to them during the process. The VA allows their approved lenders to handle the VA loans. As long as the loans the lender funds meet the VA’s minimum requirements, the VA will guarantee the loan. This means the VA will pay the lender back a portion of the funds if you default on the loan. This is the same premise of mortgage insurance, which is why you don’t have to pay it.
The VA uses money from the funding fee that you pay at the onset of the loan in order to cover the defaulted loans. If a borrower defaults on a loan, the VA pays the lender back 25% of the loan amount. The VA will guarantee loans up to $453,100, which means a guarantee of up to $113,275. That’s a much larger amount than the average homebuyer would put down on a home so it puts the lender in a good position.
Paying the Funding Fee
The funding fee is where the VA gets the money to pay lenders back if they have a defaulted loan. The VA charges the funding fee every time you take out a VA loan. This means with every purchase loan as well as refinance loan.
The only borrowers that won’t pay the VA funding fee are those that were disabled during or as a result of their service and that have been rated disabled by the VA. The only other borrowers that are exempt from the funding fee are widowed spouses of active duty members that lost their lives while on active duty or as a result of their duty.
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Regular military members pay 2.15% of their loan amount. Regular military members are those in the Army, Navy, Air Force, or Marines. Members of the National Guard or Reserves will pay 2.4% of their loan amount for the funding fee. You can pay the amount upfront or ask the lender to wrap it into your loan amount. If you wrap it into your loan, though, you will end up paying more for it since you will pay interest on the funding fee for the next 3 years.
If you decide to refinance your VA loan, you will pay the funding fee again. The type of refinance you do will determine how much you pay. If you take a cash-out refinance, you will pay the same funding fee as you did when you purchased the loan.
If you decide to take advantage of the VA’s streamline refinance program, you will only pay 0.5% of the loan amount, which is a significant savings.
Lenders and the VA don’t require mortgage insurance on a VA loan because the VA provides the guarantee without it. Veterans don’t have to make a down payment and they have flexible guidelines, making it easy to qualify for a VA loan. The VA doesn’t worry about a high default rate, though, because they have put proper guidelines into place that default unlikely.
Meta Description: You don’t have to pay mortgage insurance on a VA loan even though you borrow as much as 100% of the home’s value.
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