Do California VA Loans Require Mortgage Insurance or PMI?

We’ve answered many questions relating to the VA loan program in the past, to educate borrowers about this important benefit. Today, we’ll tackle another frequently asked question among home buyers.

In California, do VA loans require private mortgage insurance (PMI)? Is there some other kind of insurance premium associated with these loans? And if so, how does it affect my monthly payments?

Mortgage Insurance Not Required for California VA Loans

The VA home loan program allows military members, veterans, and certain qualifying spouses to buy a home in California with no money down — and no mortgage insurance.

Those are two powerful benefits you just won’t find with other mortgage programs and products. This program essentially rewards military members for their service and sacrifice, by clearing a path to homeownership.

This is an important benefit, because it can save the homeowner thousands of dollars over the life of the loan. It also reduces the size of the monthly payments, compared to someone who does pay mortgage insurance.

Other Programs Do Require Mortgage Insurance

With a regular or conventional loan in California, borrowers who put down less than 20% on a home purchase typically have to pay for private mortgage insurance (PMI).

This is a common, industry-wide requirement. Mortgage insurance is almost always required when the loan-to-value (LTV) ratio rises above 80%, which occurs when someone puts down less than 20%.

The same is true for FHA loans. The FHA program allows for a down payment as low as 3.5% of the purchase price. But here again, borrowers must pay for mortgage insurance that can increase the size of their monthly payments. Many people who use the FHA program have to pay insurance for as long as they keep the loan.

But the VA loan program is unique in that it does not require mortgage insurance — even if the borrower puts zero money down up front. This is a tremendous benefit that explains the popularity of this program among California’s military members and veterans.

How Much PMI Costs, on Average

By taking PMI out of the picture, the VA loan program can help California homeowners reduce their monthly housing costs. To illustrate this, we’ve used some realistic numbers that show how significant those monthly savings could be.

According to the Urban Institute, the average cost of private mortgage insurance in the U.S. ranges from 0.58% to 1.86% of the loan amount, per year. The table below shows what that range would come out to in dollar amounts per month, using various loan sizes.

The median home price in California is currently around $770,000. That means most home buyers with PMI would fall somewhere in the middle of this table, in terms of their monthly mortgage insurance costs.

But those home buyers who use VA loans do not have to pay mortgage insurance, even when they put down little to no money up front. So the VA program helps home buyers on the front end, by removing the down payment, as well as lowering their monthly costs.

You’ll Probably Have to Pay a Funding Fee

You might wonder how the Department of Veterans Affairs pays for this program, if they don’t charge mortgage insurance.

One of the ways they compensate is by imposing what’s known as a funding fee. Most home buyers who use a VA loan in California have to pay a funding fee, typically at closing.

As it states on the Department of Veterans Affairs website:

“This fee helps to lower the cost of the loan for U.S. taxpayers since the VA home loan program doesn’t require down payments or monthly mortgage insurance.”

When you compare the funding fee to the average cost of private mortgage insurance in the U.S., the VA loan program is still a better deal from a borrower’s perspective. Over the long term, PMI will end up costing more than the one-time funding fee for VA loans. Some homeowners with PMI have to pay it for many years before they can cancel the policy.

Other VA Loan Benefits

The VA loan program allows home buyers in California to avoid private mortgage insurance, as explained above. But that’s just one of several benefits for borrowers.

Here’s a more complete list of benefits this program offers:

• It allows you to buy a home sooner rather than later by removing the down payment.
• VA loans typically offer lower interest rates when compared to conventional financing.
• VA loans do not require mortgage insurance, which can result in long-term savings.
• VA loans have very flexible credit requirements, making it easier to qualify.
• You could refinance down the road with little out-of-pocket cost and no home appraisal.
• VA loans are assumable. Another veteran could take on your loan when buying the home.
• If you pay off your loan early, you cannot be charged a prepayment penalty.
• You can use your VA home loan benefits over and over again throughout the years.
• It can be used with various property types (detached homes, condos, manufactured, etc.).

You won’t find another mortgage program that offers so many overlapping benefits. But the biggest benefit of all relates to the down payment. By financing 100% of the purchase price, borrowers can greatly reduce their upfront expenses.

The 5 Most Important Points to Remember

We covered a lot of information in this article, for the sake of being thorough. So let’s wrap up by summarizing the most important points. Here are five things to take away from this guide:

1. California VA loans do not require borrowers to pay private mortgage insurance (PMI).
2. Conventional loans with low down payments usually do require mortgage insurance.
3. VA loans also allow buyers to purchase a property in California with no money down.
4. The VA charges borrowers a funding fee to make up for the lack of mortgage insurance.
5. But the funding fee is a one-time payment that costs less than mortgage insurance, long term.