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VA Home Loan Topics

A Closer Look at the VA Funding Fee

 

The VA funding fee is 2.3% of the amount borrowed on a VA home loan. The fee increases to 3.6% for borrowers who have already used the VA loan program in the past. However, the funding fee can be reduced by putting at least 5% down at the time of closing.

The VA Funding Fee is a governmental fee applied to every VA purchase and refinance loan. This fee goes directly to the Department of Veterans Affairs to help cover losses and keep the loan guaranty program running for future generations of military homebuyers.

The fee changes depending on several factors, including the type of VA loan, whether the borrower has used the VA loan benefit before and whether there’s a down payment. Historically, regular military members pay slightly lower funding fees than Reservists and National Guard members. However, in 2020 fees for all military branches are equivalent due to the passing of the Blue Water Navy Vietnam Veterans Act.

Borrowers with service-connected disabilities and select others might not have to pay it at all.

Let’s take a closer look.

VA Funding Fee for Purchase Loans

As you’ll see, contributing a down payment decreases the funding fee for both first-time and repeat VA borrowers. The funding fee is lower for a veteran's first use of the VA loan program, and you can see that it increases for all subsequent uses of the benefit.

Here’s a look at the funding fee tables for VA purchase loans in 2020:

Funding Fee Table for VA Purchase Loans for Regular Military veterans
Service Down Payment 1st Use After 1st Use
Regular Military None 2.3% 3.6%
- 5% or more 1.65% 1.65%
- 10% or more 1.4% 1.4%
Reserves/Guard None 2.3% 3.6%
- 5% or more 1.65% 1.65%
- 10% or more 1.4% 1.4%

VA Funding Fee for Refinance Loans

The VA has two refinance products: The Interest Rate Reduction Refinance Loan (IRRRL) and the Cash-Out refinance. The funding fees for each type of VA refinance differ, in part because of their objectives.

The IRRRL exists to get current VA homeowners into a lower mortgage rate or out of an adjustable-rate loan. The Cash-Out refinance allows qualified veterans to refinance and extract cash from equity, and it’s open to qualified veterans with VA and non-VA loans.

Unless they’re exempt, all VA homeowners pay the same 0.5 percent funding fee on an Interest Rate Reduction Refinance Loan, regardless of their service history or how many times they've used the VA loan program.

The funding fee breakdown for a Cash-Out refinance is similar to a VA purchase loan, except borrowers cannot lower their funding fee by making a down payment or using equity.

Here’s fee chart for a VA Cash-Out refinance:

Funding Fee Table for VA Cash-Out Refinance Loans
Service 1st Use After 1st Use
Regular Military 2.3% 3.6%
Reserves/Guard 2.3% 3.6%

Paying the VA Funding Fee

Mortgage lenders will verify your funding fee status during the loan process. The Certificate of Eligibility will usually indicate whether or not the borrower must pay the VA Funding Fee.

You’ll pay a lower funding fee the first time you use the VA loan benefit. The rate rises for all future VA loans unless you’re getting an Interest Rate Reduction Refinance Loan (IRRRL), which is the VA’s Streamline refinance product.

This fee is due at your loan closing. Lenders will collect and send the funding fee payment to the VA through an automated system. Mortgage lenders have no control over a borrower’s eligibility for the funding fee or what they’re required to pay.

VA buyers can ask the seller to pay this fee on their behalf, pay it in cash or finance it into their loan. Veterans getting a VA refinance can pay the fee out of pocket or finance it over the life of the loan.

Most VA borrowers who are required to pay it choose to finance the VA Funding Fee, which on a VA purchase is the only closing cost you can roll into the loan.

On a typical $200,000 loan, a Regular Military veteran using a VA loan for the first time would borrow an additional $4,600 to cover the funding fee.

VA Funding Fee Exemptions

The VA exempts certain borrowers from paying the funding fee on either a purchase or a refinance.

Those who do not have to pay the VA Funding Fee include:

  • Veterans who receive compensation for service-connected disabilities
  • Veterans who would receive disability compensation if they didn’t receive retirement pay
  • Veterans who are rated as eligible to receive compensation on the basis of a pre-discharge exam or review
  • Veterans who can but are not receiving compensation because they’re on active duty
  • Purple Heart recipients
  • Surviving spouses who are eligible for a VA loan

When evaluating funding fee exemptions, lenders will typically look at the Certificate of Eligibility or a Verification of VA Benefits. For veterans who receive retirement pay instead of VA compensation, lenders can use a copy of the original disability rating notification and financial documents that show the retirement income.

There are situations where the exemption status isn’t clear cut. Only the VA can make a determination regarding funding fee exemptions.

Lenders are required to collect the funding fee and send it to the VA in cases where the borrower’s exemption status can’t be cleared up before closing.

Borrowers who have a disability claim pending at the time of closing are required to pay the funding fee. If the veteran is awarded disability compensation after the loan closes, it may be possible to obtain a refund of the VA Funding Fee.

Uncommon Funding Fee Scenarios

When two veterans with VA loan entitlement get a loan together, the funding fee is still in play. But it can wind up working a bit differently in these relatively uncommon cases. A major consideration is who’s contributing VA loan entitlement.

If two veterans are each contributing entitlement but one of them is exempt from paying the funding fee, the funding fee on their loan is cut in half. If this same set of veterans is seeking a VA loan but the veteran who’s exempt is not contributing entitlement, then their loan would carry the full funding fee.

Last, VA loan assumptions come with a 0.5 percent funding fee.

Talk with a Veterans United loan specialist if you have questions about VA loan closing costs, including the funding fee.

Check your VA Loan eligibility here →