The VA Loan is well known because it is the only mortgage product today that allows for no-down payment. What makes the VA Loan even more attractive is that it also has no private mortgage insurance, which a borrower would find with a conventional loan unless a 20% down payment is made.
â€œMost conventional mortgage programs will charge PMI to protect the lender against default on a loan,â€ said Dan Davis, VA Loan Specialist with VA Mortgage Center.Com. â€œThis money (PMI) is non-refundable, even if you never default on the loan. It doesnâ€™t go toward your principal or interest, so itâ€™s wasted money.â€
And while PMI does finally go away on a conventional loan after the homeowner has 20% equity in the home, VA only requires a one-time funding fee that can be financed into the loan in order to limit the overall cost of the loan to the veteran.
â€œThe VA Funding Fee is still considerably less than the equivalent of paying PMI for 15 years,â€ Davis said.
The VA funding is typically 2.15% of the borrowerâ€™s loan amount for a first-time VA Loan user. Subsequent uses of the VA Loan increase the VA funding fee to 3.3%. Davis points out that while PMI is neither refundable nor tax deductible, the VA funding fee is added to your principal loan balance, which wonâ€™t affect how much you can write off for tax purposes. It also wonâ€™t take away from the amount you pay down on your principal loan amount each month, but it does ultimately add a few thousand dollars to you mortgage loan.
VA Funding Fees can be lowered however, depending on the size of down payment thatâ€™s made. In fact, a 5% down payment will lower the funding fee to 1.50%; a 10% down payment will lower the funding fee to 1.25%.
And for veterans with 10% or more service-connected disability, they are exempt from the VA Funding Fee.
â€œConventional lenders arenâ€™t as forgiving,â€ Davis said, â€œtheyâ€™ll only remove PMI if you have a very large down payment or a good deal of equity in the home.â€
Bennington VT, Buying