What is the VA funding fee?
A VA home loan is an attractive mortgage option for qualifying veterans, active members of the military and surviving spouses. The VA funding fee, which is a one-time payment VA loan borrowers pay at closing, goes to the Department of Veterans Affairs to keep the program going. Ultimately, the fee was created to make up for defaulted VA loans. It also helps lower loan costs for taxpayers.
The funding fee is considered a form of mortgage insurance; rather than requiring a monthly fee like PMI, it's a one-time lump-sum payment.
How is the VA funding fee calculated?
The VA funding fee is calculated based on the type of VA loan, whether or not there's a down payment and if the borrower has ever taken advantage of a VA loan in the past.
In 2021, the funding fee is 2.3% of the total loan amount for first-timers and 3.6% of the total loan amount on successive loans. Although a feature of the VA loan is 0% for a down payment, borrowers can choose to put more than 5% down on the home to potentially reduce the funding fee. The price of the funding fee is typically lower for active-duty service members than for those in the National Guard or Army Reserve.
| Minimum down payment | Funding fee for first use | Funding fee after first use |
|---|---|---|
| 0% | 2.30% | 3.60% |
| 5% | 1.65% | 1.65% |
| 10% | 1.40% | 1.40% |
Source: U.S. Department of Veterans Affairs
VA funding fee FAQ
Who pays the VA funding fee?
Borrowers pay the VA funding fee as part of closing costs. Once the lender receives the funding fee, they allocate the funds to the VA on the borrower’s behalf. Although the funding fee is due at the closing table, you can choose to roll the costs into the loan.
The funding fee can also be paid through seller concessions — sellers can pay up to 4% of the appraised value in costs. A Certificate of Eligibility from the VA must be sent to the lender in order to verify if the fee is applicable.
Who is exempt from paying the VA funding fee?
Veterans who receive disability compensation of 10% or greater are exempt from paying a funding fee. The surviving spouses of veterans who died in combat are also exempt, as well as recipients of the Purple Heart (as of January 2020).
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.
Do you have to pay VA funding fees on a refinance?
Yes. The two VA refinance loans are Streamline Refinance (IRRRL) and VA Cash-Out. IRRRL requires a 0.5% funding fee, and VA Cash-Out requires a 2.3% fee for first-time use and 3.6% for subsequent use.
Is the VA funding fee part of closing costs?
The VA funding fee is part of closing costs and is the only fee that can be rolled into the loan. Borrowers can choose to pay the funding fee at the closing table instead.
The VA requires an inspection before closing in almost every state. For the most part, sellers pay for the termite inspection fee, but buyers may have to pay for repairs found during the inspection. Homeowners are also required to pay property taxes, which are set by local governments, so the cost depends on your location.
The other costs a borrower can expect to pay with a VA home loan include fees for origination, appraisal and title work.
- Origination charge: Lenders are allowed to charge 1% of the loan in origination fees. This pays for origination, processing and underwriting services for the loan.
- Appraisal fee: Every VA loan is required to get an appraisal completed on the home. The VA sets the price for the appraisal, not the lender. The fee for an appraisal varies, and the buyer pays this fee upfront.
- Title work: Title insurance protects the lender and buyer. Lenders will require title work to be completed, which protects their interest in the home. This is a service the buyer has the right to shop for.
Bottom line
Although a VA home loan has a funding fee attached, this type of loan has some pretty attractive features. One major benefit to a VA loan is that there’s no down payment requirement. Borrowers can take out a loan for as much as the lender is willing to give. Additionally, VA loans have more lenient qualification guidelines, like allowing a higher debt-to-income ratio and loan-to-value ratio for cash-out refinances.
VA loans do not have prepayment penalties attached to them, so borrowers can pay off the loan as soon as they want without being charged extra fees. There’s also a shorter waiting period for borrowers who have filed for bankruptcy or foreclosed on a home in the past.
Aside from the funding fee, VA loans have stricter appraisal and inspection standards than other loan options and tend to have longer closing times. Other disadvantages to VA loans: They’re exclusively for primary residences, and some sellers aren't open to offers for VA loan financing. Ultimately, if you qualify for a VA loan, your personal situation will determine if it's the right fit for you, but this type of loan is often ideal for those who qualify, even with the attached funding fee. Just be prepared to pay this fee as a lump sum.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- U.S. Department of Veterans Affairs, “VA funding fee and loan closing costs.” Accessed April 21, 2021.
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