The one-time payment that the service member, Veterans, and survivor pay on a VA-backed or VA direct home loan is called a VA funding fee.
Since the VA home loan program doesn’t require down payments or monthly mortgage insurance the VA funding fees help in lowering the cost of the loan for the taxpayers.
If a borrower is using a VA home loan to improve, buy, build, or repair their home or is refinancing a mortgage, they’ll need to pay the VA funding fee unless they are exempted from paying due to certain leverage.
A borrower won’t have to pay the VA funding fee if they’re:
The borrower may be eligible for a refund of the VA funding fee if they’re later awarded VA compensation for a service-connected disability.
The effective date of their VA compensation must be retroactive to before the date of their loan closing.
Borrowers pay this fee when they close their VA-backed or VA direct home loan.
The cost of the VA funding fees depends on the amount of their loan and other factors.
For all loans, the VA funding fee will be based on the type of loan a borrower takes, and the total amount of their loan.
The funding fee is calculated as a percentage of the borrower’s total loan amount.
Depending on their loan type, the fee varies on:
If it’s the first time or a subsequent time, that the borrower is using a VA- loan, and also depends on their down payment amount
In addition to closing fees, the borrower’s lender will also charge interest on the loan.
So it is important for the borrower to talk to their lender about any loan costs that may be added to their loan amount.
Borrowers can review the VA funding fee rate charts to determine the amount they’ll need to pay.
The Down payment and VA funding fee amounts are expressed as a percentage of the total loan amount.
For instance – If a borrower is using a VA-backed loan for the first time, and they’re buying a home for $200,000 and making a down payment of 5% ie. $10,000.
The borrower pays a VA funding fee of 1.65% of the balance amount which is $190,000. The funding fee is not applicable to the purchase price of the home but only to the loan amount.
Rates for VA borrowers if they are a first time user and –
After the first use and
If the borrower only used a VA-backed or VA direct home loan in the past to purchase a manufactured home, they’ll still pay the first-time funding fee.
The funding fee rate if it is first-time use is 2.3%, after first use the rate is 3.6%.
Here for refinancing loans the VA funding fee rates don’t change depending on the down payment amount.
If a borrower used any of the VA loans to purchase a manufactured home, they only need to pay the first-time use funding fee.
The VA funding fee rate for Native American Direct Loan (NADL) –
The VA funding fee rate for NADL loans doesn’t depend on the amount of down payment or whether the borrower has used the VA home loan program in the past.
The VA funding fee rates for these loans also are not dependent on the down payment amount or the past history of usage of the VA home loan program.
The home loan lender will determine the following details of a borrower’s loan:
These rates are not the same everywhere. When a borrower adds the VA funding fee and other loan costs to their loan, it could lead to them owing more money than the fair market value of the home.
This will reduce the benefit of refinancing as the payment wouldn’t be as low as they may want it to be.
The seller usually must pay the closing costs which are sometimes referred to as seller’s concessions.
The closing costs consist of –
The buyer or the seller can negotiate as to who will pay other closing costs like:
A seller can’t pay more than 4% of the total home loan in the seller’s concessions. But this rule is applicable for some closing costs, like the VA funding fee. It doesn’t cover loan discount points.
The administrative fee that is added to most VA mortgages is the VA funding fee.
The VA loan guaranty program is supported by the funding fee so that the mortgages can remain to be cheaper and available to future veterans.
Qualifying veterans are able to get low-interest rates, zero down payment, and need not pay any mortgage insurance.
Even with the VA funding fee, VA home loans are the most affordable loan type to purchase or refinance a home.
The VA funding fees depend on the percentage of the loan amount, but not all loans require the same percentage.
The Veterans Administration which is now the U.S. Department of Veterans Affairs (VA) established a mortgage loan program called VA loan.
Where Veterans, service members, and their surviving spouses can purchase homes with little to no down payment and no private mortgage insurance with the help of VA loans, and they usually get a very competitive interest rate.
The VA loans, provide up to 100% financing on the value of a home. Borrowers who qualify can use a VA loan to buy or build a home, improve and repair their home, or refinance a mortgage.
The VA home loan provides lots of benefits to eligible Veterans, service members, and their spouses. Many Veterans need to pay a VA funding fee in order to keep this benefit running for years to come.
Let us look at – what is the purpose of the VA funding fee, how much does it costs, and who is exempted from paying the fees.
Of the total amount borrowed with a VA home loan, the VA funding fee is a one-time fee of 2.3%.
The borrowers can apply for a VA loan more than once, but when using a VA loan after the first time and if the down payment is less than 5% then the VA funding fee increases.
Of the total loan amount, the VA funding fee ranges between 1.4% to 3.6%.
For borrowers who have previously used the VA loan program, the funding fee increases to 3.6%, but this can be reduced if they put a down payment of at least 5% at the time of closing.
The Department of Veterans Affairs requires VA funding fees and it gets applied to every VA purchase and refinances loan.
The purpose of charging a funding fee is to help cover any losses and to keep the program running for future Veteran homebuyers.
The calculation of the VA Funding Fee depends on various factors – like the type of VA loan, if the borrower has used the VA loan benefit before and if there’s a down payment.
Borrowers who have service-connected disabilities and select others might not have to pay the funding fees at all.
The Reservists and National Guard members pay slightly higher funding fees than what the regular military members pay.
However, now due to the passing of the Blue Water Navy Vietnam Veterans Act of 2019 fees for all military branches are equal.
According to the VA funding fee table for 2021, first-time borrowers purchasing with a VA loan receive a lower fee than subsequent users.
And though not necessarily by making a minimum 5% down payment both first-time and subsequent purchasers can reduce the funding fee.
The current VA funding fee rates on purchase loans for Veterans, active military and Reserves and National Guard members are as follows:
With no down payment for a first-time VA loan user, the funding fee is 2.3% and for a subsequent VA loan user, it is 3.6%.
If the down payment is 5% or more then for a first-time VA loan user the funding fees are 1.65% and for subsequent VA loan users it is 1.65%.
The funding fee further reduces to 1.4% for both the first-time VA loan user and for subsequent VA loan users if the down payment is 10% or more.
Many a time the borrower has questioned whether the VA funding fee is based on the loan amount or on the purchase price?
The answer to that is – VA funding fee is based on the total loan amount, and not on the purchase price of the home.
There are two refinance products in VA loans –
The funding fees for each type of VA refinance vary, because of their objectives.
To get current VA homeowners into a lower mortgage rate or to move them from an adjustable-rate to a fixed-rate VA loan the IRRRL exists.
Qualified veterans are allowed to refinance and extract cash from equity with the Cash-Out refinance, and it’s open to eligible veterans with VA and non-VA loans.
The VA funding fee for borrowers using the VA streamline refinance (IRRRL) is 0.5 % regardless of service history or prior usage (unless it is exempted).
The funding fee for Cash-Out refinance and for VA purchase loans are quite similar, except borrowers cannot lower the VA funding fee by making a down payment or using equity.
The VA funding fee rates on VA Cash-Out refinance loans for Veterans, active military and Reserves, and National Guard members for first-time users is 2.30% and after the first use, the funding fee is 3.60%.
The mortgage lenders do not control who must pay the VA funding fee or on the specific amount.
The veteran’s Certificate of Eligibility (COE) typically indicates if they need to pay the VA funding fee.
Those required to pay the VA funding fee should make it at the time of closing. The lender is responsible for collecting the funding fee and sending it directly to the VA.
Some Veterans may have the fee waived entirely so not all borrowers are required to pay the VA funding fee.
The VA exempts a few borrowers from paying the funding fee on both purchase and refinance loans.
Those exempted from paying the VA funding fees are:
Lenders will look at the Certificate of Eligibility or a Verification of VA Benefits which is sometimes known as the VA funding fee exemption form when they are evaluating funding fee exemptions.
For veterans who receive retirement pay, a copy of the original disability rating notification and financial documents can be used by lenders to show the retirement income.
When the exemption status is not clear then only the VA can determine funding fee exemptions.
Lenders should collect the funding fee and send it to the VA in situations where the borrower’s exemption status isn’t confirmed before closing or when at the time of closing, the borrower has a pending disability claim.
It may be possible to obtain a refund of the VA Funding Fee in cases where the veteran is awarded disability compensation after the loan closes.
VA funding fee is a one-time fee which is a percentage of the total loan amount which needs to be paid by borrowers if they are purchasing or refinancing a VA loan.
This funding fee helps to cover the losses and helps in keeping the program running for future VA home loan borrowers.