Can a Bank Require Mortgage Insurance on a VA Mortgage

By Luke Arthur

Private mortgage insurance is a type of insurance product that most homeowners are forced to purchase in order to protect their lender. This insurance coverage is required in case the borrower goes into default. With VA mortgages, the borrower should not have to worry about paying private mortgage insurance on the loan.

The function of private mortgage insurance, or PMI, is to limit the amount of risk that a lender has to deal with. This is a type of insurance policy that borrowers pay for with a monthly premium attached to their mortgage payments. If the borrower goes into default, the insurance company will step in and reimburse the lender a certain amount of money. This mortgage insurance is usually required for buyers who do not put down at least 20 percent on the purchase of their homes.

VA loans are offered by traditional lenders and backed by the Veterans Administration. If you are a member of the active military or a veteran, you can access a VA loan. These loans have numerous benefits such as not requiring a down payment and easier qualification standards. One of the biggest benefits of this type of loan is that lenders cannot charge PMI to the consumer.

Lenders do not charge private mortgage insurance premiums to a customer with a VA loan because it is unnecessary. With a VA loan, the federal government is standing behind each mortgage. If the homeowner cannot afford the payments, the government will step in and reimburse the lender for a portion of the mortgage. If the lender collected money for private mortgage insurance, it would essentially be getting two guarantees on the same loan.

This can be a very attractive benefit for veterans and active military members. When you do not have to pay a private mortgage insurance premium, this can cut $100 or $200 off of your mortgage payment for an average size house. This means that your mortgage payment will be much more affordable. You could also potentially benefit by getting a bigger house than you would be able to afford with a traditional mortgage.

Some home buyers try to get out of paying private mortgage insurance by using a piggyback mortgage. This is an arrangement where the borrower actually secures two loans on the same property. One loan is for 80 percent of the value and the other loan is for 20 percent. This allows them to avoid private mortgage insurance. With VA loans, you can get around PMI without having to get two separate loans. Everything will be handled with one lender and you only have to worry about making one payment.

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