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VA funding fee: Everything to know about home loan costs

Bankrate logo Bankrate 2/17/2020 Miranda Marquit
a young woman taking a selfie: GettyImages-1065578878 © SDI Productions/Getty Images GettyImages-1065578878

For U.S. service members and veterans, the VA loan program is one of the best ways to get the funding needed to buy a house. It's even possible to refinance an existing VA loan home with the help of a new VA loan.

However, one of the requirements of getting one of these government-guaranteed loans that come with competitive interest rates is the payment of the VA funding fee. Here's what you need to know about how it works and the requirements associated with it.

What is the VA funding fee?

Each VA loan comes with a funding fee. Unlike an FHA loan, which requires borrowers to pay an upfront mortgage insurance fee of 1.75 percent of the loan amount, there is no insurance requirement with a VA loan. On top of that, there are no down payment requirements with a VA loan. As a result, the VA funding fee is designed to help reduce the cost to taxpayers in the event the loan goes into default.

The VA funding fee is paid at closing, and it's based on the loan amount.

How much is the VA funding fee?

The VA funding fee is based on how much you borrow, the amount of your down payment as well as on your current duty status. Additionally, whether you've received a VA loan before figures into the equation. The chart below provides information on how much you can expect to pay as a funding fee if you are buying a home as Active Duty Military, Reserves or National Guard and you close your loan between January 1, 2020, and December 31, 2021.

Amount of down paymentFirst-time useSubsequent use
None2.30%3.60%
5% – 9.99%1.65%1.65%
10% or more1.40%1.4%

It's important to note that a bigger down payment (less borrowed) results in a smaller funding fee. It might not seem like a big deal, but it can make a difference.

Consider a $200,000 home purchased by a first-time VA loan user. If you put no money down, your funding fee would be $4,600. However, if you have a 10 percent down payment, you're only borrowing $180,000. Then you have a smaller VA funding fee of only $2,520.

If you have the money for a down payment, you could reduce your overall loan costs by reducing the amount you borrow (and pay interest on) and paying a smaller funding fee.

How much is the VA funding fee for a refinance?

It's also worth noting that you can use the VA loan program to refinance your home. There is just one fee for a refinance, however. You pay 2.3 percent of the amount borrowed for your first use and 3.6 percent for the subsequent use of the program.

There are some exceptions to having to pay a higher funding fee for further use of the program, the main one being the higher subsequent use fee doesn't apply if you used your previous entitlement for a manufactured home.

Check VA refinance rates before you decide to move forward, and compare them with other options.

Is there a VA funding fee exemption?

Not everyone is required to pay a funding fee when they get a VA loan. You might receive a VA funding fee exemption if you are:

  • Disabled and receiving VA compensation for a disability connected to your service
  • Receiving military retirement pay in lieu of compensation for a service-connected disability
  • On active duty, but you provide documentation on or before closing showing that you've been awarded the Purple Heart
  • Eligible to receive compensation as the result of a pre-discharge and you have the appropriate paperwork presented before the loan closes
  • A surviving military spouse whose partner died from a service-related disability, or died in service and is receiving Dependency and Indemnity Compensation

One of these circumstances can save you money by making you eligible for the VA funding fee exemption, but you need to make sure you have all the necessary documentation to prove your situation by the time the loan closes.

How to pay the VA funding fee

One of the easiest ways to pay the fee it is to roll it into your loan. However, if you decide to roll it into your loan, you'll pay interest on it. Basically, it becomes part of your loan total.

It's also possible to pay the VA funding fee upfront with cash. If you have the available resources, this can save you money on interest over the life of the loan, since you won't be increasing the cost of your loan with the funding fee.

Carefully consider the funding fee, and your options, so that you can make a choice that works best for you.

Will VA funding fees change?

It's important to note that the VA funding fee isn't always the same. The current funding fee table is good from January 1, 2020, until December 31, 2021 -- essentially two years. However, after that period, the government might change the funding fee.

Be aware of the potential changes to the funding fee, as well as the possibility that other changes could be made to the VA loan program. Remember, the program is subject to change, and VA loan rates, refinance rates and other aspects of the program could all change in the future.

Even with the possibility of change and the presence of the VA funding fee, however, it's worth noting that the VA loan program still offers a number of advantages to veterans, active duty service members and their families. Run the numbers using a VA loan calculator to figure out if getting one of these loans is the right move for you.

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