What is a VA Funding Fee? | Military Home Spot Lending

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What is a VA Funding Fee?

07-20-2020 • MHS Lending

VA Home Loans are incredible mortgage options available exclusively to military families and veterans. Their strong benefits include no PMI (private mortgage insurance), more relaxed credit requirements, lower interest rates, and a $0 down payment requirement. While there is no down payment required, these loans often incur what is called a VA funding fee. But what is a VA funding fee? Funding fees are one-time costs that are paid directly to the Department of Veterans Affairs and are rolled into the loan if you choose.

VA Funding Fees Explained

Funding fees are fees added on to almost every VA purchase and refinance loan. The fee is paid to the government in order to cover any losses and keep the program going. According to military.com, it also helps relieve U.S. taxpayers the full burden of backing these loans. All fees collected by the government are saved so VA Loans remain available to service members.

VA funding fees work similar to a deductible on car insurance. If you happen to default on your mortgage, the VA would pull from it’s coffers of funding fees in order to offset the bank or lenders losses. The government guarantees up to 25% of VA Loans (AKA the offset). This guarantee lowers the risk of offering VA Loans to military members and service members without down payments and allows them to finance their homes completely.

In order to pay the funding fee, buyers have two options. One option is to include the fee into the full amount of the loan and pay it off over time. This is the most popular option for buyers. Another option is to pay the fee in full during closing as part of closing costs.

How Much Do Funding Fees Cost?

The price of a VA funding fee varies based on many factors. Some of the top variations are due to the type of loan being funded, the amount of times the veteran or military member has used a VA loan, and if they have a service-related injury.

Funding fees for VA Loans in 2020 (According to VA.gov):

Purchase and Construction Loans:

  • First use with a down payment of less than 5% = 2.3% funding fee
  • After first use with a down payment of less than 5% = 3.6% funding fee

Cash-Out Refinancing Loans:

  • First use = 2.3% funding fee
  • After first use = 3.6% funding fee

Native American Direct Loan (NADL):

  • Home purchase = 1.25% funding fee
  • Home refinance = 0.5% funding fee

Interest Rate Reduction Refinancing Loans (IRRRL’s):

  • 0.5% funding fee

*some call this the Streamlined Refinance

Manufactured Home Loans (not permanently affixed):

  • 1% funding fee

Loan Assumptions:

  • 0.5% funding fee

Vendee Loan, for purchasing VA-acquired property:

  • 2.25% funding fee

One thing to note about funding fees is they only apply to the loan amount instead of the purchase price. This means if you were to put a down payment, the fee would only be applied towards the remaining balance.

Will I Have to Pay a VA Funding Fee?

While the funding fee applies to VA Loans, there are a few official exceptions to who has to pay. Some veterans and military members/ spouses qualify to have the fee waived. If your fee is waived that will be indicated on your Certificate of Eligibility (COE) and your loan officer will take care of the rest. Below are some of the exceptions laid out by the VA:

  • Veteran receiving VA compensation for a service-connected disability.
  • Surviving spouse of a veteran who died in service, from a service-connected disability.
  • Spouse of a totally disabled veteran who is receiving Dependency and Indemnity Compensation (DIC).
  • Servicemember or active duty member who provides evidence (prior to closing) of having the honorable purple heart.

Your lender has no control over whether or not an applicant for the COE is considered eligible to waive fees. The Department of Veterans Affairs follows these exceptions carefully and indicates any exceptions on the COE. In some instances, if a buyer has a disability, lenders can use a copy of the disability rating notification along with financial documents showing retirement income.

What if I Pay a Down Payment?

If you don’t meet any of the exceptions, there may still be a way for you to avoid having to pay the full funding fee. Those who are able to put down a down payment of at least 5 percent may be eligible for reduced funding fees. These reduced fees can only apply to VA backed purchase and construction loans and vary based on how much you put down. Here are the 2020 Purchase and Construction Loan fees based on down payments:

First Use of Loan- Down Payment Breakdown

  • Less than 5% = 2.3% funding fee
  • 5% or more = 1.65% funding fee
  • 10% or more = 1.4% funding fee

After First Use of Loan- Down Payment Breakdown

  • Less than 5% = 3.6% funding fee
  • 5% or more = 1.65% funding fee
  • 10% or more = 1.4% funding fee

Funding fees exist so the Department of Veterans Affairs can continue to offer this amazing benefit to military families purchasing a home. If you are still curious about funding fees work or want to learn more about VA Home Loans, you would greatly benefit from our free VA Home Loan Seminar. This easy to use, online course is free and gives you the tools you need to feel confident through your home buying journey. It can even help you save money! If you purchase your home with a Military Home Spot lender or realtor, your appraisal costs are on the house (up to a $600 value).