Do California VA Loans Require Mortgage Insurance or PMI?

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

These are common questions among home buyers who are considering the VA loan program. Today, we will answer these questions in detail.

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.

So no, California VA loans typically do not have mortgage insurance or PMI associated with them.

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.

And when you add in the zero-down-payment option, the benefits grow even more. In short, this program saves you money up front while also increasing your purchasing power.

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. This insurance also increases the total cost of the loan over time.

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

Enter the VA 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.

But unlike mortgage insurance (which is a recurring monthly expense), the VA loan funding fee is a one-time payment. This fee usually ranges from 2.3% to 3.6% of the loan amount, and can be waived for certain borrowers.

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 much better deal from a borrower’s perspective.

According to Freddie Mac, private mortgage insurance can cost anywhere from $30 – $70 per month, for every $100,000 borrowed. For a loan amount of $300,000, that would equate to an added monthly expense somewhere between $90 and $210 per month. For a $500,000 mortgage loan (which is more realistic for many California cities), PMI could cost anywhere from $150 – $350 per month. And that’s a recurring fee. The VA funding fee is a one-time payment.

Summary of Key Points

We covered a lot of information in this article, because we believe in being thorough. Let’s wrap up with a brief summary of the key points you should take away from this:

• California VA loans typically do not require mortgage insurance or PMI.
• That’s just one of the benefits this unique program offers to home buyers.
• VA loans also allow borrowers to purchase a home with no money down.
• Conventional loans with low down payments usually require mortgage insurance.
• To compensate, the VA does require borrowers to pay a funding fee.
• The funding fee is a one-time payment that costs less than mortgage insurance over time.

Have questions? Bridgepoint Funding specializes in California VA loans. Located within the San Francisco Bay Area, we serve the entire state of California. Please contact us if you have any questions relating to this program.