This is for veterans, service members, and surviving spouses who could buy with VA or with a conventional loan and want to know what each extra charge is for. It will not tell you which loan costs less for you. That depends on your loan amount, down payment, and how long you keep the loan, and your lender shows it on a Loan Estimate.
What the VA funding fee is for
The VA funding fee is a one-time payment on a VA-backed or VA direct home loan. The VA says the fee helps lower the cost of the loan program for taxpayers, because VA loans do not require a down payment or monthly mortgage insurance.
The fee is set by the VA. It depends on the loan type and the loan amount, and on some loan types it also depends on whether this is your first VA loan and how much you put down. We walk through that split in VA funding fee: first use vs later use.
What PMI is for
Private mortgage insurance is insurance you may have to buy on a conventional loan when your down payment is below a set level. The Consumer Financial Protection Bureau says PMI protects the lender, not you, if you stop making payments. Your lender arranges it and a private insurance company provides it. If you fall behind, PMI does not stop a foreclosure.
PMI can help you qualify for a loan you might not get otherwise. It also adds to what the loan costs.
How you pay each one
The funding fee is paid once, when the loan closes. You can finance it into the loan and pay it off over time, or pay the full fee at closing. On a VA purchase, the funding fee is the only charge you can finance into the loan amount.
PMI is most often a monthly premium added to your mortgage payment. Some loans use a one-time premium paid at closing instead, and some use both. The monthly premium shows in the Projected Payments section on page 1 of your Loan Estimate. An upfront premium shows in section B on page 2.
That difference changes what you compare. A financed funding fee makes the loan balance larger. A monthly PMI premium makes the monthly payment larger for as long as it lasts.
Does either one go away?
The funding fee does not come back each month, because you pay it once. There is no later step to remove it.
PMI can end. Under the federal rules, you can ask your servicer to cancel PMI once your balance is scheduled to fall to a set point against the home's original value, as long as you ask in writing, are current, have no second lien, and the value has not dropped. In general it must end on its own at a later scheduled point, or the month after the halfway mark of the loan term, if you are current. The first date you can ask should be on the PMI disclosure you get with your loan. Fannie Mae and Freddie Mac loans can have their own cancellation rules, which cannot be less favorable to you.
When neither one applies
Some VA borrowers pay no funding fee. Exemptions cover borrowers receiving compensation for a service-connected disability, surviving spouses receiving Dependency and Indemnity Compensation, and a few other cases. See VA funding fee exemption checks for the paperwork side.
On a conventional loan, PMI is not required when your down payment reaches that set level. Some lenders offer low down payment conventional loans without PMI, usually in exchange for a higher interest rate. Whether that trade costs more depends on how long you stay in the home.
A note on FHA
FHA loans have their own mortgage insurance, which is different from both the VA funding fee and conventional PMI. If you are also weighing FHA, start with VA loan vs FHA loan.
What to ask your lender
Bring these to the quote call:
- Does my Certificate of Eligibility show that I owe a funding fee, or that I am exempt?
- If I finance the funding fee, how does that change the loan amount and cash to close?
- On a conventional quote, is PMI monthly, upfront, or both?
- When is the first date I could ask to cancel PMI on that quote?
- Over the years I expect to keep the loan, how do the two quotes compare side by side?
Lay both Loan Estimates next to each other and compare the same lines. For more on reading the PMI side, see PMI checks before an offer.
FAQ
Is the VA funding fee a type of mortgage insurance?
Not in the way PMI is. The funding fee is a one-time charge that helps cover the program's cost for taxpayers, and VA loans do not require monthly mortgage insurance. PMI is insurance that protects the lender on a conventional loan.
Can I get a refund of the funding fee?
Sometimes. You may be eligible for a refund if you are later awarded compensation for a service-connected disability with an effective date before your loan closed. A proposed or memorandum rating that comes after closing does not qualify.
If I pay an upfront PMI premium and then refinance, do I get money back?
You might not. The Consumer Financial Protection Bureau says that if you pay an upfront premium and then move or refinance, you might not be entitled to a refund.
Can the seller pay my funding fee?
A seller credit can cover the funding fee. That credit counts as a seller concession, and concessions are capped against the home's reasonable value. Your lender and the VA Notice of Value show the cap for your deal.
One thing to do
Ask your lender to show the funding fee financed and paid in cash, next to a conventional quote with PMI, over the years you plan to keep the loan. You can start your VA purchase request here.
Sources: VA, "VA funding fee and loan closing costs"; CFPB, "What is private mortgage insurance?"; CFPB, "When can I remove private mortgage insurance (PMI) from my loan?"; BankPricer, "VA funding fee: first use vs later use"; BankPricer, "VA funding fee exemption checks"; BankPricer, "VA loan vs FHA loan"; BankPricer, "PMI checks before an offer"
Jeff Shin, Mortgage Loan Originator, NMLS #1041652. Chicago. Equal Housing Lender. Not a commitment to lend.