For eligible veterans, servicemembers and surviving spouses who are hoping to become homeowners, the VA loan program provides a lot of benefits to help them do so. With good interest rates, low- or no-down-payment options and no monthly mortgage insurance, a VA loan is a great mortgage option for those who are eligible.
Though there are a lot of positives of getting a VA loan, all these great benefits do come at a price – or rather, a fee. While it’s only a small percentage of the overall loan amount, the VA funding fee can be a significant cost for borrowers. What is it, how does it work and how much can home buyers expect to pay? Let’s take a look.
What Is A VA Funding Fee?
The VA funding fee is a one-time fee paid to the Department of Veterans Affairs that supports the VA loan program. Veterans who put down less than 5% on their home purchase will pay 2.3% of the total loan amount when buying a home for the first time and 3.6% on subsequent loans.
VA borrowers can pay less on the funding fee by putting down more money on the home. Our chart below specifies what you’ll pay depending on how much you put down and whether you’ve used the program before or not.
This governmental fee changes periodically. The current fee structure will remain in place until January 1, 2022.
Why Is The VA Loan Funding Fee Assessed?
VA loans are guaranteed by the Department of Veterans Affairs. This means that if a borrower defaults on the loan, the lender is protected from the loss because the government insures the loan. The funding fee helps with this cost and others related to the VA loan program and ensures that the program remains sustainable.
How Much Does It Cost? Check Out This VA Funding Fee Chart
One of the big benefits of a VA loan is that borrowers can get a mortgage with 0% down. However, there is an advantage to putting down a larger down payment, as the percentage you put down is directly related to how much you’ll pay for your funding fee. A larger down payment means a smaller funding fee.
This fee structure applies to purchase and construction loans. For cash-out or regular refinance, first-time borrowers will pay a 2.3% funding fee, while subsequent borrowers pay 3.6%. For Interest Rate Reduction Refinance Loans, also known as a streamline refinance (where you’re refinancing your current VA loan into another VA loan), the funding fee is 0.5% for all borrowers.
How Is The Fee Paid?
The VA funding fee is due at the time of closing and is included as one of the closing costs a borrower has to pay. Your lender sends the paid fee to the VA on your behalf.
The funding fee can be a significant and costly closing cost for borrowers. Fortunately, you don’t necessarily have to pay it all out of pocket in one lump sum. You have a few options for how this fee gets paid.
- Paid upfront as a closing cost
- Financed as part of the loan
- Seller pays
While you can pay the funding fee at closing if you choose, you also have the option to roll the fee into your mortgage loan. While this will increase the size of your loan and your monthly payments, it can make the fee easier to pay since you aren’t having to pay several thousand dollars upfront.
You can also have the seller pay the fee as a seller concession. According to VA rules, sellers can pay certain costs on behalf of the buyer, as long as these concessions don’t exceed 4% of the loan. However, certain costs, such as payment of discount points, are not subject to this limit.
Are There Any VA Funding Fee Exemptions?
Not every borrower has to pay the VA funding fee. Be sure to find out if you’re eligible for an exemption, as changes have been made to funding fee exemption rules in 2020 to allow certain Purple Heart recipients to receive an exemption. The following are circumstances under which someone would be eligible for a funding fee exemption:
- Individuals who receive compensation for a service-related disability
- Individuals who are eligible for a service-related disability pay but receive retirement pay or active service pay
- Surviving spouses who meet the eligibility requirements for the VA loan program
- Active duty servicemembers who have been awarded the Purple Heart
To find out if you’re eligible for an exemption to the VA funding fee, check out your VA loan Certificate of Eligibility. It will state whether you’re exempt or nonexempt. If you don’t yet have a COE, you can learn how to apply on the VA website.
Is Anyone Eligible For A VA Funding Fee Refund?
If you paid the funding fee but believe you were eligible for an exemption at the time you paid it, you may be eligible for a refund. One example of this would be if you had a pending disability claim as you went through the home buying process that was approved after closing. If the effective date of your compensation is prior to the date you closed on your home, you may be able to get a refund on your funding fee.
If you believe you’re entitled to a refund, reach out to your lender or call your VA Regional Loan Center at (877) 827-3702.
Even with the funding fee, VA loans are a great option for those who are eligible for the program, whether you’re purchasing a new home or refinancing your current home loan.
As you prepare for the home buying process, be sure you’re aware of your VA loan eligibility status, as well as whether you’ll have to pay the funding fee. If you aren’t eligible for a funding fee exemption, start thinking about how much, if anything, you want to put down on the house, or if you’d prefer to pay the full funding fee and potentially roll it into your loan.
Interested in applying for a VA loan? Get started today with Rocket Mortgage® by Quicken Loans®.
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