Whether you use a VA loan to buy a home or to refinance, borrowers will probably pay the VA Funding Fee. This one-time charge can be paid upfront at closing or rolled into your future monthly payments.
Several factors go into calculating how much this fee is including whether the borrower has used his VA home benefit before and whether he’s making a down payment.
The money received from the VA Funding Fee goes to the Department of Veterans Affairs (DVA). That organization uses these funds to repay lenders a portion of the loan if a homeowner defaults on his payments. It also helps the DVA maintain its loan guarantee program so military members in the future can become homeowners. The VA Funding Fee helps reduce the burden on U.S. taxpayers.
Click here for today's mortgage rates.How much is the VA Funding Fee?
The VA funding fee ranges from 0.5 to 3.6 percent of your loan amount. A number of variables determine the exact fee amount, including whether you are making a down payment, your entitlement code, whether you’ve used the benefit before, and the type of VA loan you want.
First-Time Use Purchase & Construction Loans
| Down Payment | Veteran & Active Duty | Reservist & National Guard |
| Less than 5%* | 2.3% | 2.3% |
| 5% to 9.99% | 1.65% | 1.65% |
| 10% or more | 1.4% | 1.4% |
*Including cash out refinance loans
Second-Time Use Purchase & Construction Loans
| Down Payment | Veteran & Active Duty | Reservist & National Guard |
| Less than 5%* | 3.6% | 3.6% |
| 5% to 9.99% | 1.65% | 1.65% |
| 10% or more | 1.4% | 1.4% |
*Including cash out refinance loans
Streamline Refinance & Interest Rate Reduction Refinance Loan (IRRRL)
| Type of Loan | Veteran & Active Duty | Reservist & National Guard |
| First-Time Use | 0.50% | 0.50% |
| Second-Time Use | 0.50% | 0.50% |
Other Types of VA Loans
| Type of Loan | Veteran & Active Duty | Reservist & National Guard |
| Assumption | 0.50% | 0.50% |
| Manufactured Home | 1.00% | 1.00% |
For someone using their veteran benefits for the first time buying a home, that person would pay 2.3 percent of their loan amount. On a $250,000 home, with no down payment, the VA Funding Fee would be $5,750.
When you make a down payment of $12,500 (5 percent of the $250,000 loan) on that same house, then your VA Funding Fee will be $3,918. That’s because you only pay the fee on the loan amount, which is now $237,500, not the price of the home. Your percentage also went down to 1.65 percent because you made a down payment.
If two veterans get a loan together, an unusual circumstance, the funding fee operates a little differently. When both veterans are entitled to the VA loan, then the funding fee is divided in half. If one veteran is exempt, but not entitled, then the full funding fee must be paid.
During the loan process, your lender will let you know the exact amount of the fee you must pay or even if you must pay. Traditionally, your Certificate of Eligibility indicates whether or not you’ll pay the VA Funding Fee. Certain veterans, military personnel and spouses have exemptions from the VA Funding Fee.
Subsequent use funding fees
The first time a veteran uses the VA mortgage loan program, he pays a lower fee than during the second or subsequent times. If he or she is exempt from paying the fee the first time the loan benefit is used, he or she will also be exempt any time after when using the VA mortgage program.
For example, let’s consider someone who has already bought a house with a VA loan. He has sold that home and is now buying another one. The new home costs $250,000. Without a down payment, his Veterans Funding Fee will run $9,000 or 3.6 percent of the loan amount.
Compare that to a 2.3% Funding Fee if it were his first time buying a house with a VA loan.
But a higher funding fee doesn’t always apply, even if you use the VA loan twice.
- You are subject to just a 1.0% finding fee no matter how many times you use a VA loan for a manufactured home.
- Additionally, if you refinance your current VA loan with a VA streamline refinance, the funding fee drops to just 0.50%.
- If you pay a 5% or 10% down payment, the funding fee remains the same as for first-time use.
Who is exempt from the VA Funding Fee?
As it turns out, several categories of veterans, military personnel, and spouses don’t have to pay this fee. Here’s the list:
- Disabled veterans who receive compensation because their disability is service-related.
- Retired veterans who could receive disability pay if they weren’t already getting retirement earnings.
- Veterans eligible to receive compensation because of a pre-discharge review or exam.
- Veterans on active duty who are otherwise eligible for compensation.
- Service members on active duty who have received the Purple Heart (when someone in the military is injured due to enemy action; this rule became effective in 2020)
- Surviving spouses of a veteran who has passed or who was totally disabled, and the spouse is getting Dependency and Indemnity Compensation (DIC).
Lenders look at an applicant’s Certificate of Eligibility (COE) or Verification of VA Benefits to determine whether he or she is exempt from the VA Funding Fee. When the situation doesn’t seem definitive, the VA makes the final determination. If, for some reason, that can’t be accomplished prior to closing, lenders must collect the fee and send it to the VA. Then when a determination is made, the VA either keeps the money or refunds it.
VA Funding Fee Refund
Buyers who have a disability claim pending when it comes time to close on your home must pay the VA Funding Fee. Later, if your claim is accepted, you can apply for a VA Funding Fee refund.
If you’ve heard uncomplimentary things about the VA Funding Fee refund status, the VA completed an initiative in 2019 that solves that problem. The VA did an internal review of VA-backed home loans for the past two decades. In that review, they discovered that more than 130,000 loans had refunds due. Some of these oversights were due to clerical errors and many affected Veterans whose exemption status changed after their mortgage closing.
Veterans eligible for a refund were notified by mail. Programs and systems have been changed and updated so refunds won’t be overlooked in the future.
How to Avoid Paying the VA Funding Fee Out of Pocket
If you don’t qualify for any of the exemptions above, you can ask the seller to pay your VA Funding Fee. The seller can pay up to 4 percent of the loan amount towards the Funding Fee, plus things like property taxes and insurance. The seller can pay for additional things that don’t count toward the 4 percent, such as the appraisal, credit report, and discount points.
The other way, and probably the most likely way for a home buyer to avoid handing over a large chunk of money at closing, is to wrap the VA Funding Fee into your total loan amount. You’ll then finance it and pay it off over time. That, of course, means an increase in your mortgage payments. Also, be aware that your lender charges interest on your loan, so by financing the VA Funding Fee, you’ll pay more than if you paid it all at once at loan closing.
Click here for today’s mortgage rates.Changes to the VA Funding Fee
When the President signed the Blue Water Navy Vietnam Veterans Act in 2019, it triggered an increase in VA Funding Fees.
Starting in January 2020, the fee for first-time buyers with no down payment is 2.3 percent of their loan amount, up from 2.15 percent in 2019. Those who have used their VA home loan benefit before will pay 3.6 percent of their loan amount, up from 3.3 percent in 2019. These higher fees will remain in place for two years, then go back to 2019 rates from 2022 through September 30, 2029.
The fees will now be equal for all the branches of the military including the National Guard and reservists. Previously, the National Guard and anyone in the military reserves paid a little higher fee.
Updates to VA Loan Limits in 2020
Another change that took effect in January 2020 is VA loans are no longer subject to loan limits. If you want to buy in a more expensive housing market, you can extend your buying potential more than ever before. And with no down payment.
This doesn’t mean you can buy a house you can’t afford. You still need enough income to qualify for the loan and must meet your lender’s credit requirements.
One more caveat — those who are already paying on a VA loan or who defaulted on a previous loan — are subject to loan limits in 2020. Those VA loan limits match those put in place by the Federal Housing Finance Agency (FHFA) on conforming loans.
Closing Costs to Consider, In Addition to the VA Funding Fee
Besides the VA Funding Fee, VA loan borrowers may be asked to pay other closing costs. Those may include, but aren’t limited to:
Loan origination fee. Lenders can charge up to 1 percent of your VA loan for origination, processing, and underwriting charges.
Credit report. A lender may charge you for getting your credit information, but the VA limits that to $50 maximum.
Title insurance. This protects both you and your lender in the event liens or other legal issues are discovered after closing. Consider buying owner’s title insurance, too. This protects your investment from claims for something that happened before you purchased the home. Most common of these are the previous owner didn’t pay taxes or he neglected to pay a contractor for work he did on the home.
VA appraisal fee. If you haven’t already paid for your home’s appraisal, you’ll need to do so at closing.
Recording Fee. This is a charge from a government agency, usually the county your home resides in, to register your purchase. Then it becomes public record.
Discount points. These are fees you may pay to your lender to get a lower interest rate on your mortgage loan.
Property taxes. Any taxes due within 60 days must be paid at closing.
State and local taxes. And state and local taxes must be paid if applicable.
Well, septic, and termite inspection fees. In 41 states, buyers aren’t allowed to pay for a termite inspection. Usually, the seller pays for fixing any issues that stem from these inspections.
Mortgage closing costs typically run from 2-5 percent of your loan. On our sample $250,000 home that calculates to $5,000-$12,500. Some of these fees may be negotiable, you can ask the seller to pay some of them, or you can make some of them part of your monthly mortgage payments.
You can ask the seller to pay all your closing costs or ask them to share the burden with you. The VA allows sellers to pay the VA Funding Fee, for discount points, appraisal fee, credit report, state and local taxes and recording fees.
If the seller pays a portion or all of your Veterans Funding Fee, then he can also pay your property taxes, insurance and pay down your credit card balance. The amount he pays on these concessions can’t exceed 4 percent. For our example home, selling for $250,000, that computes to $10,000.
Ready to talk to a lender? Click here.VA Funding Fee FAQ
How much is the VA IRRRL funding fee?
The VA Funding Fee for the refinancing product, Interest Rate Reduction Refinance Loan (IRRRL) is 0.5 percent for everyone whether you’ve used your VA loan benefits before or not.
Is the VA Funding Fee tax deductible?
Maybe. Unless you’re exempt, you must pay the fee in its entirety at closing to be able to deduct it on your taxes. You will use tax form 1098, “Mortgage Interest Statement,” and enter the amount in box no. 5.
How much is a VA cash out refinance funding fee?
Rates for the first use of this benefit are 2.3 percent of your loan amount and subsequent users pay 3.6 percent of the loan amount.
Do all VA loans have a funding fee?
Yes, this fee applies to every VA purchase and refinance loan, unless you’re exempt.
Is there a VA Funding Fee for a refinance?
Yes.
Bottom line
Even considering the VA Funding Fee, which you may not have to pay, a VA home loan can be a wonderful deal.
These loans come with a government guarantee, which means if you’re unable to make your payments, a portion of your loan will be repaid to the lender. This reduced risk for the lender translates to lots of benefits for the buyer.
You can move into your dream home with no down payment, you don’t have to buy mortgage insurance and the rates are great. You can use your VA loan to buy a house, condominium, duplex, newly constructed home, manufactured home and other kinds of properties, also. Pay off your loan whenever you want, with no prepayment penalties.
The VA loan program can become complicated, so to get the most accurate information up front, engage a VA lender from the beginning.
Click here for today's cash-out refinance rates.