The VA loan program allows U.S. service members and veterans to buy a home with no down payment. The trade off: You’ll pay a VA funding fee, a percentage of the mortgage. Here’s why VA lenders charge this fee, how much yours will cost and more.
What is the VA funding fee?
With few exceptions, most VA loan borrowers pay a VA funding fee. This fee is a one-time charge that enables borrowers to take out a VA loan without needing to make a down payment.
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How does this work? Although VA loans are offered by many types of lenders, they’re guaranteed by the U.S. Department of Veterans Affairs. This guarantee protects lenders from loss if the borrower were to default and stop paying back the loan. The funding fee helps mitigate this risk — without it, taxpayers would ultimately be on the hook for defaults.
The cost of the VA funding fee is a percentage of your mortgage, which varies by borrower based on:
- Whether you’re buying a home or refinancing
- Whether it’s the first time you’ve obtained a VA loan
- Whether you’re making a down payment (and, if so, how much)
How does the VA funding fee differ from mortgage insurance?
The VA funding fee only applies to VA loans. In contrast, mortgage insurance applies to borrowers taking out a conventional or FHA loan with less than 20 percent down. Both the funding fee and mortgage insurance help protect the lender, and the costs for each are based on various factors, including the amount of the mortgage. However, the funding fee is a one-time charge, whereas with mortgage insurance, borrowers pay ongoing premiums.
Learn more: Our guides to private mortgage insurance (PMI) and FHA mortgage insurance
How much is the VA funding fee?
Here’s how much you’ll pay for the VA funding fee, whether you’re buying a home as active-duty military, a veteran or a member of the Reserve or National Guard. The same fee structure applies if you’re taking out a VA construction loan.
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Down payment First use After first use Less than 5% 2.15% 3.3% 5%-9.99% 1.5% 1.5% 10% or more 1.25% 1.25%
There’s at least one exception to the after-first use fee: If you used your previous entitlement for a manufactured home, you might only have to pay the VA funding fee at the first use rate.
Congress calculates the VA funding fee scale based on the costs of running the VA loan program. The latest fee structure took effect on April 7, 2023. With that change, if you put less than 5 percent down, the VA funding fee for first use cases fell from 2.3 percent to 2.15 percent. The subsequent use funding fee went from 3.6 percent to 3.3 percent. The fees could change again in the future.
VA funding fee for refinancing
You can also use the VA loan program to refinance your mortgage. The funding fees are:
Refinance type First use After first use Interest Rate Reduction Refinance Loan (IRRRL) 0.5% 0.5% Cash-out refinance 2.15% 3.3%
VA funding fee exemptions
While most VA loan borrowers need to pay the funding fee, there are a few exceptions. You won’t have to pay this fee if you’re:
- Disabled and receiving VA compensation for a disability connected to your service
- Receiving military retirement or active-duty pay in lieu of compensation for a service-connected disability
- On active duty and you’ve been awarded the Purple Heart
- Eligible to receive compensation as the result of a pre-discharge
- A surviving military spouse whose partner died from a service-related disability, or died in service and you’re receiving Dependency and Indemnity Compensation
How to pay the VA funding fee
You can pay the VA funding fee in one of two ways:
- Upfront in cash with the rest of your closing costs
- By rolling the fee into your mortgage, paying it over time with interest
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If you can afford to pay the fee at closing, you’ll save money on interest.
Note that some VA lenders might cover the funding fee for you. USAA, for example, covers the cost of the funding fee for IRRRLs.
VA funding fee refunds
If you already paid a VA funding fee in the past, you might be able to recoup that if you wind up receiving compensation for a disability related to your service. This is a unique situation, so contact a VA loan expert to review your case. You can talk to a VA loan officer by calling 877-827-3702, Monday through Friday from 8:00 a.m. to 6:00 p.m. Eastern Time.
FAQ
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What are the VA funding fee rates for different types of loans?
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Can you negotiate the VA funding fee with the seller?
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What are other closing costs for VA loans besides the VA funding fee?
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Source: https://tholansonnha.com
Category: Finance
