Everything You Need to Know About VA Home Loan Funding Fees

If you’re a veteran or involved in the veteran world to some extent, you’re probably no stranger to the concept of VA home loans. VA home loans are part of the VA loan program, which offers veterans the opportunity to become homeowners, with added benefits. For example, while most home loans come with high interest rates and a hefty down-payment requirement. VA loans offer lower interest rates and a no-down-payment option.

These things can make all the difference for veterans who are transitioning from active duty to civilian life, and who may be looking for a source of income in the meantime. Even better, VA home loans usually do not have monthly mortgage insurance, making it a great overall mortgage option for eligible veterans. 

However, there is a price to pay for such benefits. 

What is the funding fee, and how much is it?

VA borrowers are required to pay the VA funding fee, a one-time fee that’s paid to the Department of Veterans Affairs to support the VA home loan program in return. Essentially, it’s a cycle that keeps giving back. The fee is typically paid when veterans close on their homes, and it can be financed if necessary. The rule of thumb says veterans who put down less than 5% on their home purchase are required to pay 2.3% of the total loan amount when buying a home for the first time and 3.6% on subsequent loans. Ultimately, the larger the down payment, the less borrowers have to pay later.

The amount that is owed depends on a number of factors, including the type of VA home loan used, whether the home loan is the first loan or one of several, and whether or not the veteran paid a down payment—and if so, how much. From there, borrowers can determine how much they’ll have to pay towards the fee. 

What’s the difference between a funding fee and mortgage insurance?

Unlike mortgage insurance, funding fees can be paid when veterans close on their homes and financed if necessary. In addition, since VA home loans are backed by the federal government to some extent, the buyer and lender are both partially protected. 

Who is exempt from paying the funding fee?

Not every borrower is required to pay the VA funding fee. Some exceptions include:

• Those who receive compensation for a service-related disability or who are eligible for retirement or active duty pay (as little as 10%!)
• Individuals who are eligible for compensation but not receiving it because they are on active duty
• Surviving spouses who also meet eligibility requirements for the VA loan program
• Active duty Purple Heart recipients

In some cases, veterans who have paid the funding loan but are eligible for exemption may be able to get a refund. For example, a veteran may have a disability or retirement claim that was approved after the closing of the home buying process but receive compensation prior to the closing date. In this circumstance, they would be entitled to a refund.

How can veterans pay the VA funding fee?

As is the case with many loans, there are a few ways that veterans can go about paying the VA funding fee. Some veterans may choose to finance the funding fee over the life of the loan while others may choose to pay out of pocket at closing. For veterans who choose to pay the fee at closing, there is the option to roll the fee into the mortgage loan, which would increase the size of the loan and bill of monthly payments. In turn, however, this would make paying the fee easier as it spreads the amount out over time rather than demanding to be paid upfront. Still, others may choose to ask the seller to pay the fee on their behalf.

Ready to find out if you’re eligible for a VA home loan, or need to discuss financing your VA funding fee? Contact us today, and our team would be happy to help! We have resources that can help you strategize to make sure you’re making the smartest decisions on your journey to homeownership.