What is PMI? Do I Need it for a VA Loan?

private mortgage insuranceBorrowers who make less than a 20% down payment on a home loan typically must pay for private mortgage insurance (PMI). VA Loans don’t have this requirement, which can result in a lot of savings for the borrower.

What is Private Mortgage Insurance (PMI)?

Private mortgage insurance or PMI is an insurance policy that protects the lender if you default on the loan. If the lender must repossess the house and sell it for less than the amount remaining on the loan, they will be covered by this insurance. Essentially, the lender gets protected. You pay for that protection because the cost is added into your loan payment amount.

While that might seem annoying, it makes it feasible for banks to give you a loan without requiring as much of a down payment as they otherwise would. Before PMI was created, banks wouldn’t give loans to people unable to make a large down payment.

How the Amount is Calculated

The cost of private mortgage insurance varies depending on the total loan amount and the size of your down payment. It can range from around 0.3% to 1.5% of the original loan amount annually. For example, a $180,000 loan with $20,000 down might have an additional $52 added to each monthly payment to cover the private mortgage insurance fee.

Lenders must cancel private mortgage insurance when the loan-to-mortgage ratio drops to 78%. Borrowers can request it a little bit sooner, when the ratio reaches 80%.
Loan-to-value ratio is calculated like this:

Mortgage amount owed / appraised value
Example: $70,000 mortgage balance / $100,000 value = 0.70 or 70% loan-to-value

Loans with No PMI Required

The best way to avoid paying private mortgage insurance is to get a loan that doesn’t require it in the first place. You can do that by making a very large down payment so your loan-to-value ratio is 80% or lower from the start. Or you can get a type of loan that doesn’t require it.

VA loans don’t require private mortgage insurance. Because the government backs up these types of loans, the lender is protected already. Avoiding private mortgage insurance can save thousands of dollars over the life of a loan.

Can Divorce Affect a VA Loan?

divorceAfter a divorce, you may be ready to re-establish roots somewhere new by purchasing a home on your own. Many current and former military personnel may be interested in applying for a VA loan. They generally have great rates and terms. They also have a low, down payment requirement.

However, to qualify for a VA loan, you still need to provide a substantial amount of paperwork for the underwriting process. The underwriter will need to confirm that your debt-to-income ratio meets the program’s guidelines.

Divorce can impact many aspects of your finances. Because of this, it can affect your VA loan application in several ways.


The Need for Additional Documentation and Paperwork

Your divorce decree may specifically state which spouse is responsible for various debts, such as a mortgage, a car loan, credit cards and more. It is common for the underwriter to request a copy of the finalized decree, as well as any additional legal documentation, regarding alimony and child support payments. In addition, the lender may require proof that certain debts have been paid off or are no longer in your name.

The Impact on Your Credit Rating

During a divorce, you may sell the house you formerly owned, sell a car or pay off a car loan. You also may use funds from the divorce to pay off credit cards and more. You may transfer debt to different accounts. Applying for a consolidation loan to get debt transferred into your name is also allowed.

These are only a few of the common steps people take to separate assets during a divorce. The impact of so many changes on your credit report in such a short period of time can be a drop in your scores. However, if your spouse assumed much of the debt, or your debts have been paid off, the opposite result may be true. It is wise to review a copy of your credit report before you apply for a VA loan so that you are aware of your current financial situation.

The Possibility That Finances Are Mingled

Despite the best efforts to separate finances, some couples will still have co-mingled finances after a divorce. For example, while one spouse retained ownership of the house, the mortgage may still be in both names. Depending on how the divorce decree is worded and the laws of your state, the underwriter may be able to disregard the mortgage payment when underwriting your loan request. However, in some cases, you may still be viewed as legally responsible for that debt until the loan is paid off or refinanced.

As you can see, applying for a VA loan can be more complicated after a divorce. However, it is possible for many recent divorcees to still qualify for a home loan. Plan to provide ample documentation to the underwriter upon request. And be patient with the process. By doing so, you may be able to achieve your status of being a homeowner soon.

VA Loan Basic Entitlement vs. Secondary Entitlement Program

va loan entitlementWhen it comes to VA loans, “entitlement” refers to the maximum guarantee the VA provides to a lender for the eligible VA borrower. It is not the maximum loan amount the veteran can receive. VA loan entitlement can be a bit confusing as it has two parts: the basic entitlement and the bonus or secondary entitlement. Here’s how loan entitlement works:

VA Loan Entitlement: Basic and Secondary Entitlement Explained

If you have never used the VA loan program, you have the basic and bonus (secondary) entitlement. The $36,000 figure you see on your Certificate of Eligibility (COE) refers to the basic entitlement. This is the VA’s maximum guarantee for a mortgage up to $144,000.

Bonus entitlement is also available for up to an additional $68,250 (in certain high-cost counties). This amount, called the secondary entitlement, is used for VA mortgages between $144,000 and the conforming loan limit, which is usually $417,000.

As a first-time VA borrower, you will begin with enough entitlement for a loan of up to $417,000.

How Entitlement is Used

When a veteran uses his VA loan entitlement, he can use all or some of it. The VA guarantees one-quarter of the full loan amount. This means borrowers usually use one-quarter of their entitlement to purchase a home. For example, with a standard $200,000 VA mortgage that isn’t in a high-cost county, the veteran will use $50,000 of entitlement. He or she will still have $54,250 entitlement remaining ($104,250 basic and secondary entitlement – $50,000 entitlement used).

Loan entitlement is not a single-use benefit. An eligible service member can reuse their entitlement for the rest of their life. Even if a veteran has used all his entitlement to buy a home, VA loan entitlement can be fully restored when the loan is paid in full. This may be done by selling the home and paying off the mortgage. They also may pay off the mortgage and, using a one-time restoration benefit, keep the property as a second home or rental property.

It’s even possible to have two VA mortgages at the same time. This usually happens when a service member buys a home and has a PCS (Permanent Change of Station). The service member can choose to keep the primary home to rent it out. In this case, the borrower may have enough entitlement remaining to buy a new home without a down payment.

What Happens if a Veteran Doesn’t Have Enough Entitlement?

It’s somewhat common for a veteran to find he does not have enough entitlement remaining after buying a first home with the VA entitlement. This is especially the case if the first VA loan was lost to foreclosure. The good news is the secondary entitlement can be used to allow veterans who have gone through foreclosure on a VA property to buy again. The veteran’s COE will explain how much entitlement is remaining.

In some cases, the borrower does not have enough entitlement remaining for a new VA loan. It’s still possible to get a VA mortgage with a down payment, often with less down than is necessary with other loan programs.

Borrowers who are unsure of their remaining entitlement can speak with a VA mortgage specialist. They will be able to explain more about using the VA entitlement for the first, second, or even third time.

VA Loan Rates: Why Do They Change?

va loan ratesDeciding to buy a home is a huge decision and is confusing with all the terminology that gets thrown around. One option for veterans is to use a lender that offers VA loans. Once you decide that a VA loan is right for you, the next thing to examine is VA loan rates from one lender to another.

A lower interest rate on a loan means that you’ll have a lower monthly payment and end up paying much less over the life of the loan.

VA Loan Rates

What are the Benefits of a VA loan?

A VA loan does not require a down payment, unlike other loan programs. Most require at least 20% down to avoid paying private mortgage insurance, while a VA loan you can finance the entire cost of the mortgage.

Since VA loans are guaranteed by the government, individuals who get a VA loan and don’t put down at least 20% are exempt from paying for PMI. This also means you’ll have a lower monthly payment than you would with other loan types.

Lenders offer VA loans because they are government guaranteed and create less of a risk than other mortgage programs to the lenders.

Why and how Often do rates change?

VA loan rates are highly regulated, but they’re not fixed and vary depending on how the market performs that day. In the past, the VA set their own lending rates, but that’s not the case any longer. Lenders are allowed to charge their own rates to keep the market competitive with other VA lenders and other loan programs.

The Government National Mortgage Association (GNMA), commonly referred to as Ginnie Mae, provides liquidity in the market. They do this by purchasing VA loans from the lenders that issue them.

Lenders sell the loans to get money to provide more loans to consumers. The GNMA 30 year bond gets traded on the market daily like other securities and bonds that are bought and sold based on investor strategies.

Every day lenders look at the Ginnie Mae bond price and change their interest rates to match. The index each lender uses is the same, meaning that rates vary little from one lender to another. Rates from one lender to another aren’t static but don’t expect to see drastic differences when looking at the different loan rates from one bank or credit union to another.

Rates can change daily and frequently vary from the morning until the afternoon, especially if something affects the market. Investors put money into the market if they feel confident about how the economy is doing.

They’re more likely to invest money in stocks and transfer money from bonds. This causes interest rates to increase, while rates tend to decrease if investors feel that economy is headed downward. Understanding

Assists in broadening your knowledge of the mortgage process and different types of loans available. This information will assist you with pursuing the loan type that fits your financial situation and home-buying goals.

Obtaining Military Documentation for VA Loans

va loan documentsAs a veteran, you will at some point want to purchase a home with a VA loan. The best way to do that is to get a home loan through the Veterans Administration. Like all other types of loans, VA loan documents will be required to get your application approved.

VA Loan Documents

The main document that you must get to secure a VA loan is the Certificate of Eligibility (COE). Once you have this document, you will be able to provide a lot of information proving that you are eligible for this type of loan.

Steps in Obtaining Certificate of Eligibility

The first step in obtaining your certificate of eligibility is to ask your lender if they offer VA loans. You will also want to ask the lender if they offer you the opportunity to obtain your COE online. Most lenders will have access to the VA loan system which can allow you to get your certificate of eligibility within a few minutes. In some cases, your lender may not be able to get this document via the internet. Then you will need to ask your lender about other ways to get this documentation.

Ways To Get Certificate of Eligibility

When looking to get your certificate of eligibility, you will need to keep in mind the three ways you can get it. First, you can use the internet and access the VA e-Benefits Portal. This will allow you to find your COE and print it out immediately. You can also send a request to the Atlanta Regional Loan Center via mail and get the COE by regular mail. Those who are looking to get their COE can also use their lender to access the VA online portal and get the document that way as well.

Other VA Loan Documents Needed

Another thing required to obtain documentation to secure a VA loan is to provide proof of service. Oftentimes, it will be necessary to provide your DD Form 214 which will provide the lender with documentation proving that you are a veteran. If you are still serving, it will be necessary to get and provide a statement of service by your personnel officer or commander. The statement must show the date of entry into the military and when you were ordered for active duty and for how much time.

As well as providing the certificate of eligibility and proof of service forms, it will be necessary to get other forms to secure a VA loan. You will need to get form 26-1880 if you have served in the National Guard, reserves and/or active duty. For those who are surviving spouses of veterans, then you will need form 26-1817 to get a VA loan. It will be very beneficial for you to work with a VA loan specialist to properly interpret the information on the forms so that you can confirm your eligibility status.