The VA Loan Funding Fee: A Complete Overview

A Comprehensive Guide to the Funding Fee

VA loans offer a remarkable opportunity for Veterans and military spouses, aiming to facilitate homeownership through benefits like no down payment and no private mortgage insurance (PMI). 

These loans stand out for their below-average interest rates, making them a highly attractive option in the housing market. A critical element ensuring the longevity of this program is the VA funding fee, a necessary contribution that supports future generations of Veteran homebuyers.

What is the VA Funding Fee?

The VA funding fee is a compulsory one-time payment to the Department of Veterans Affairs, designed to offset the loan’s cost to taxpayers. This fee varies, generally ranging from 0.5% to 3.3% based on factors such as the type of loan, whether it’s the borrower’s first VA loan and the size of the down payment.

Fee Percentages by Loan Type and Usage

• First-Time Use vs. Subsequent Use: The fee differs for those accessing their VA loan benefits for the first time compared to subsequent uses.
• Down Payment Impact: A larger down payment can significantly reduce the funding fee, providing an incentive for borrowers to invest more upfront.

Here is a table to help you understand better. 

This funding mechanism is pivotal, ensuring the VA loan program’s sustainability, and allowing Veterans and their families to achieve homeownership under favorable terms.

Determining the VA Funding Fee Amount

Factors Influencing the Fee

The VA funding fee is a critical element in the VA loan process, influenced by several key factors. The type of loan dictates the baseline fee, with distinct rates for purchase, refinance, and other loan types. 

The history of VA loan usage impacts the fee, with first-time users generally benefiting from lower rates compared to those who have utilized VA loans previously. Lastly, the size of the down payment plays a significant role; larger down payments often result in reduced funding fees, encouraging borrowers to invest more upfront.

Impact of the Blue Water Navy Vietnam Veterans Act

The Blue Water Navy Vietnam Veterans Act of 2019 brought about a significant change in the calculation of the VA funding fee. By equalizing the fees across service branches, the Act ensures that all veterans, regardless of their service branch, face the same funding fee rates. 

This legislative change underscores the government’s commitment to fairness and equality among the veteran community, ensuring that the benefits of VA loans are accessible to all eligible service members.

VA Funding Fee for Purchase and Refinance Loans

Purchase Loans

For veterans and military families looking to buy a home, the VA funding fee for purchase loans varies based on whether it’s their first time using a VA loan and the amount of down payment. 

Generally, no down payment is required for VA loans, but making a down payment can significantly reduce the funding fee. This fee structure is designed to make homeownership more accessible to veterans while still supporting the sustainability of the VA loan program.

Refinance Loans

The VA offers two main refinance options – the Interest Rate Reduction Refinance Loan (IRRRL) and the VA Cash-Out refinance. Each has a distinct funding fee structure reflecting its purposes. The IRRRL, aimed at reducing the interest rate or converting an adjustable-rate mortgage to a fixed-rate mortgage, carries a lower funding fee. 

In contrast, the Cash-Out refinance, which allows veterans to access home equity, aligns its funding fee more closely with that of purchase loans. These refinancing options provide flexibility for veterans to manage their mortgages more effectively, with the funding fees serving as a mechanism to fund these benefits.

Exemptions from the VA Funding Fee

Who’s Exempt?

• Veterans with service-connected disabilities.
• Purple Heart recipients.
• Surviving spouses eligible for VA loan benefits.

Verification Process:

Exemption status is verified through the VA, usually with documentation like the Certificate of Eligibility (COE) or proof of disability compensation.

Paying the VA Funding Fee

Payment Options:

• Financing the fee into the loan.
• Paying out-of-pocket at closing.
• Having the seller pay the fee.

Financing Example:

For a $200,000 loan, a veteran might finance an additional amount (e.g., $4,300 for first-time use with no down payment) to cover the funding fee, incorporating it into their mortgage payments over the life of the loan.

Closing Remarks

The VA funding fee is a cornerstone of the VA loan program, ensuring its sustainability for future generations of veterans and military families. With its varied structure based on loan type, usage, and exemptions for eligible individuals, it balances the program’s financial health with the benefits it offers to those who’ve served. Understanding the fee’s details, from calculation to payment options, empowers veterans to make informed decisions in their homeownership journey, upholding the VA loan’s legacy as a valuable support mechanism for U.S. military members and their families.