VA loans do not require PMI, even with no down payment

A VA loan lets you borrow without private mortgage insurance (PMI), which is the monthly fee most conventional borrowers pay when they put down less than 20 percent. With a VA loan, you can borrow the full purchase price with zero down and never pay PMI. This is one of the largest financial advantages of the VA loan program.

Instead of PMI, VA loans carry a one-time funding fee paid at closing. This fee ranges from 1.4 to 3.6 percent of the loan amount, depending on whether you have used your VA benefit before and how much you are putting down. Unlike PMI, which you pay every month for years, the funding fee is a single charge built into your loan or paid upfront.

The funding fee goes to the Department of Veterans Affairs to offset the cost of the program. It does not go to an insurance company, and it does not protect the lender — it protects future veterans by keeping the program solvent.

Key Takeaways

  • VA loans never require PMI, even when you borrow with no money down.
  • You pay a one-time funding fee instead, which ranges from 1.4 to 3.6 percent of the loan amount depending on your down payment and prior use of the benefit.
  • The funding fee is usually rolled into your loan balance, so you do not have to pay it in cash at closing.
  • If you are a surviving spouse or have a service-connected disability rated at 0 percent or higher, you may be exempt from the funding fee entirely.

How the funding fee compares to PMI over time

PMI on a conventional loan typically costs 0.5 to 1.5 percent of the loan amount per year. On a $300,000 loan with 10 percent down, you might pay $1,350 to $4,050 per year in PMI alone — and you keep paying it until you reach 20 percent equity. That can take 10 to 15 years.

A VA funding fee of 2.3 percent on the same $300,000 loan is $6,900 — paid once, not annually. Even if you roll that into your loan and pay interest on it over 30 years, the total cost is usually far less than what PMI would cost over the same period. The longer you keep the loan, the more you save.

The one exception is if you plan to sell or refinance within a few years. In that case, the upfront funding fee might not pay for itself compared to a conventional loan with PMI. But for most borrowers who stay in the home, the VA loan structure saves thousands of dollars.

Who pays the funding fee and who is exempt

Most active-duty service members and veterans pay the funding fee. The amount depends on three factors: whether you have used your VA benefit before, how much you are putting down, and whether you are a first-time user.

First-time users with no down payment pay 2.3 percent. If you put down 5 percent or more, the fee drops to 1.63 percent. If you put down 10 percent or more, it drops to 1.4 percent. Subsequent uses of the benefit cost more — 3.6 percent with no down payment, 3.0 percent with 5 percent down, and 2.75 percent with 10 percent down.

You are exempt from the funding fee if you are a surviving spouse using the benefit, if you have a service-connected disability rating (even 0 percent), or if you are on active duty and received a Purple Heart. Some surviving spouses who remarried after the veteran's death may still may have access to, depending on the date of remarriage. Ask your VA lender to verify your exemption status before you lock in your rate.

Rolling the funding fee into your loan versus paying it upfront

Most VA borrowers roll the funding fee into the loan balance rather than paying it in cash at closing. This means you finance it over 30 years (or whatever your loan term is) and pay interest on top of it. The lender adds it to your purchase price, and your monthly payment increases slightly to cover it.

If you have cash on hand and want to lower your monthly payment, you can pay the funding fee upfront at closing. This reduces the amount you borrow and saves you interest over the life of the loan. The math usually favors paying it upfront if you can afford it, but rolling it in is a common choice when cash is tight.

Either way, the funding fee must be paid or waived — you cannot skip it unless you may have access to for an exemption. Your lender will explain both options during the loan process and show you the payment difference.

VA loans and refinancing: funding fees on cash-out and rate-and-term refis

If you refinance a VA loan into another VA loan, the funding fee rules change. A rate-and-term refinance (where you just lower your rate or shorten your term) usually has no funding fee. A cash-out refinance (where you borrow extra money against your home equity) does carry a funding fee on the amount you are cashing out.

If you refinance a VA loan into a conventional loan, you lose the VA benefit on that property and will have to pay PMI if you do not have 20 percent equity. This is rarely the right move financially, but it can make sense if you are selling soon or if your credit has improved enough to get a much better conventional rate.

How VA loans stack up against FHA loans on insurance costs

FHA loans require mortgage insurance in all cases — both an upfront premium (1.75 percent of the loan amount) and an annual premium (0.55 to 0.8 percent per year). You pay both, and the annual premium stays on your loan for the life of the loan if you put down less than 10 percent.

A VA loan's single funding fee is almost always cheaper than FHA's combined upfront and annual insurance costs, especially over time. If you are may be able to access for a VA loan, it is almost always the better choice from a cost standpoint. The only exception is if you are exempt from the VA funding fee and not exempt from FHA insurance — a rare situation.

Frequently Asked Questions

Can I avoid the funding fee by putting down 20 percent?

No. The funding fee applies to all VA loans unless you are exempt due to disability, surviving spouse status, or Purple Heart. Putting down 20 percent lowers the fee from 2.3 percent to 1.4 percent, but you still pay it. With a conventional loan, 20 percent down eliminates PMI entirely.

What happens if I cannot afford the funding fee at closing?

You can roll it into your loan balance, which is what most borrowers do. This increases your monthly payment slightly but means you do not need cash on hand at closing. Your lender will show you the payment impact before you sign.

Do I pay the funding fee every month like PMI?

No. The funding fee is a one-time charge, either paid upfront or added to your loan. PMI is paid monthly until you reach 20 percent equity. This is why VA loans are usually cheaper over time, even though the upfront funding fee looks larger.

If I have a 0 percent disability rating, am I really exempt from the funding fee?

Yes. Any service-connected disability rating, including 0 percent, exempts you from the funding fee. You will need to provide a VA disability letter or a Certificate of may be able to access showing your rating. Contact the VA or your lender if you are unsure whether your rating qualifies.

Can I refinance to remove the funding fee from my loan?

No. The funding fee is part of your original loan and cannot be removed through refinancing. A rate-and-term refinance will not charge a new funding fee, but the old one stays in your loan balance. A cash-out refinance will add a new funding fee on the amount you borrow.