Understanding the VA funding fee
The VA funding fee is a one-time payment made by VA loan borrowers during the closing process. Its primary purpose is to support the Department of Veterans Affairs in maintaining the VA loan program, which offers certain guarantees to lenders. These guarantees mean that if a borrower defaults on their VA loan, the VA steps in to cover a portion of the losses incurred by the lender.
Essentially, the funding fee serves as a financial safety net, enabling the VA to provide favorable loan terms while offsetting potential losses from defaulted VA loans.
The funding fee functions as a type of mortgage insurance. But unlike private mortgage insurance (PMI), which requires monthly payments, the funding fee is a one-time, upfront payment. It helps mitigate the risk posed by the absence of a substantial down payment, which can deter some lenders.
One of the standout benefits of VA loans is competitive interest rates. By collecting the funding fee, the VA can sustain these low interest rates, ensuring that loans remain accessible to veterans and active-duty service members. This, in turn, makes homeownership more affordable and attainable for those who have served our country.
How is the VA funding fee calculated?
The VA funding fee is calculated as a percentage of your total loan amount. Which rate you use depends on several factors, including the type of VA loan, whether you’ve used the VA loan benefit before and whether there's a down payment.
Here are the current rates as of publishing:
| Down payment | Funding fee for first use | Funding fee after first use |
|---|---|---|
| Less than 5% | 2.15% | 3.30% |
| 5% - 10% | 1.50% | 1.50% |
| 10% | 1.25% | 1.25% |
For example, say this is your first time taking out a VA home loan, and the purchase price of your new home is $200,000. If you put 4% down, your loan amount would be $192,000. Your funding fee would be 2.15% of the loan amount — or $4,128.
You also have to pay the VA funding fee if you refinance your VA mortgage. The two VA refinance options are a streamline refinance (IRRRL) and cash-out refinance, each with its own rates:
- IRRRL requires a 0.5% funding fee as of publishing.
- VA cash-out requires a 2.15% fee for first-time use and 3.3% for subsequent use as of publishing.
» MORE: VA Loan Limits
Who pays the VA funding fee?
Borrowers are responsible for paying the VA funding fee during the closing process. Once the lender receives this fee, the lender directs it to the VA on behalf of the borrower.
Certain exceptions apply to the VA funding fee. Here are the conditions under which you are exempt from paying the funding fee:
- You are receiving (or are eligible to receive) VA compensation for a service-connected disability.
- You are a service member who has received a proposed or memorandum rating before the loan closing date, indicating eligibility for compensation due to a predischarge claim.
- You are an active-duty service member who received the Purple Heart prior to or on the loan closing date.
- You are the surviving spouse of a veteran and receiving Dependency and Indemnity Compensation (DIC).
To determine whether the funding fee applies to your specific situation, you must provide the lender with a Certificate of Eligibility (COE) from the VA. This document confirms you meet the necessary military service requirements or other criteria to qualify for a VA loan.
How to pay the VA funding fee
The method of paying the VA funding fee can vary based on your circumstances and preferences. You have several options:
Upfront payment
"By paying it upfront, it's one less expense to worry about in the future,” said Zev Freidus, the president of ZFC Real Estate in Boca Raton, Florida. “However, this option requires a larger upfront payment and may not be feasible for all borrowers. The main disadvantage of paying the fee upfront is that it can be a significant financial burden for some veterans and service members, especially if they are already facing other financial challenges."
Included in the loan
However, it increases your loan amount and may lead to higher monthly mortgage payments. You'll also accrue interest on the fee throughout the loan, increasing the overall loan cost.
Seller concession
However, it depends on the seller's willingness, and convincing them can be challenging. It's not always possible, and it may impact negotiations, potentially affecting the overall home price or other aspects of the deal.
Other VA loan costs
When securing any home loan, it's essential to understand the various additional expenses involved. The following also apply to conventional mortgages, but there are some limitations or requirements specific to VA loans.
- Origination fee: Lenders have the authority to impose an origination fee, which can amount to up to 1% of the loan value on a VA loan. This fee encompasses the expenses related to initiating, processing and underwriting the loan.
- Appraisal fee: Every VA loan requires a property appraisal, and the cost of this appraisal is determined by the VA, not the lender. Buyers are responsible for paying this fee upfront, and it can vary.
- Title work:Title insurance protects the interests of both the lender and the buyer. Lenders typically require title work to safeguard their stake in the property. However, buyers have the freedom to shop around for this service. Expect to pay up to 1% of the purchase price.
- Credit report fee: Lenders typically pull your credit report to assess your creditworthiness, and this fee covers the cost of obtaining your credit report.
- Home inspection: While not obligatory according to VA guidelines, obtaining a home inspection is highly recommended. The cost of a home inspection is generally the responsibility of the buyer and typically ranges from $200 to $500.
- Hazard insurance: VA loans require borrowers to maintain hazard insurance (homeowners insurance) on the property. The cost of this insurance can vary based on factors such as the property's location and the chosen insurance provider.
- Recording fees: Local government authorities charge fees to record the necessary documents related to your mortgage and property ownership. These fees can vary depending on your location.
FAQ
Is the VA funding fee tax-deductible?
The funding fee is a write-off and can be tax deductible because it qualifies as mortgage insurance.
Is the VA funding fee the same as PMI?
The VA funding fee and PMI are distinct fees applied to different types of mortgage loans:
- The VA funding fee is a one-time fee for VA home loans, aimed at offsetting program costs.
- PMI is a fee associated with conventional mortgages, required when the down payment is below 20%, to protect lenders in case of default.
How can I lower my VA funding fee?
Making a larger down payment on your home can reduce the funding fee.
What is the VA funding fee refund?
The VA funding fee refund is a reimbursement of the funding fee that was originally paid by a borrower who obtained a mortgage through the VA loan program.
If you are granted VA compensation for a service-related disability after your loan closing, you might qualify for a refund of the VA funding fee as long as the effective date of your VA compensation is earlier than the date of your loan closing.
Bottom line
The VA funding fee is a one-time cost that plays a vital role in making VA home loans accessible to veterans and active-duty service members. It serves as a financial safeguard, allowing the VA to offer competitive interest rates and flexible terms while mitigating the risk for lenders.
Borrowers are responsible for paying this fee, but exemptions apply for certain eligible individuals, such as those with disabilities or Purple Heart recipients. How you choose to pay the fee can impact your loan structure and monthly payments.
Article sources
- U.S. Department of Veteran Affairs, “ VA funding fee and loan closing costs .” Accessed Oct. 9, 2023.
- U.S. Department of Veteran Affairs, “ IMPACT OF NEW REAL ESTATE SETTLEMENT AND PROCEDURES ACT (RESPA) RULE ON FEES AND CHARGES FOR DEPARTMENT OF VETERANS AFFAIRS (VA) LOANS .” Accessed Oct. 10, 2023.
