VA Home Loans are one of the best ways for veterans to purchase or refinance a home. They offer many advantages over conventional mortgages. There are also some differences, including the VA Loan Funding Fee, which the VA requires (it can be waived in some circumstances).
So why choose a VA loan if it may come with additional fees? Because VA Loans offer a host of advantages for veteran homebuyers, including a chance to buy a house with little to no money down.
In many cases, VA Loan interest rates are competitive with, or possibly lower than, conventional mortgage rates. My wife and I found this when we recently used a VA Loan to purchase our home.
We have excellent credit scores so we could have easily qualified for a conventional mortgage or qualified for a VA Loan.
We also put down more than 20% of the purchase price, so we would not be required to pay PMI, equalizing one of the benefits of using a VA Loan. Because the government backs VA Loans, they do not require Private Mortgage Insurance, which many lenders require if you make a down payment of less than 20% of the purchase price.
A conventional loan also would have been less work on our end — it would have required less paperwork and probably would have closed a few days more quickly.
It sounds like using a conventional mortgage would have worked out well. By comparing VA Loan lenders to the offers for conventional mortgages, we were able to secure a lower interest rate, which saved us several hundred dollars per year and made it well worth applying for a VA Loan.
The final issue we had to consider, in addition to the interest rates, was the total amount of fees associated with the loan.
This is where understanding how VA Loan funding fees work is important.
Table of Contents
- No Closing Costs With a VA Loan, But You May Have to Pay a Funding Fee
- VA Loan Funding Fee Chart – 2020 And After
- VA Loan Funding Fee Chart — 2019 and Previous Years
- VA Loan Funding Chart for Home Purchase
- VA Loan Funding Chart — Cash Out Refinance
- Other Types of VA Loans:
- How VA Loan Funding Fees Work on a Mortgage
- Funding Fees for Regular Military Service
- Funding Fees for Qualifying Service Through Guard or Reserves
- How to Reduce VA Loan Funding Fees
- VA Loan Funding Fee Exemptions
- Understanding VA Loan Funding Fees Helps You Compare VA Loans and Conventional Mortgages
No Closing Costs With a VA Loan, But You May Have to Pay a Funding Fee
Many veterans use a VA Loan to finance their home because they don’t have to pay any closing costs on their purchase or make a down payment.
This can save home buyers several thousand dollars on the closing date. But VA Loans may be subject to a funding fee, which is required by federal law and is something conventional loans don’t have.
What is a VA Funding Fee?
In short, the VA Funding Fees help pay for the VA Loan program. The VA Loan program is self-sufficient and does not rely on additional government funding or funds from other VA benefits programs.
When you buy a home using a VA Loan, the Department of Veterans Affairs actually guarantees a portion of the loan amount. This makes lenders more willing to lend to homebuyers, as they know the VA guarantees a portion of the loan amount if the borrower forecloses on their loan.
The VA needs to have the cash reserves to pay for any potential loan foreclosures that they have guaranteed. Because of this, the VA Loan funding fee is required by federal law to have veterans help pay for the benefit of being able to buy a house with no down payment.
The VA charges a Funding Fee for two primary reasons:
- To help pay for the VA Loan program
- And to act similarly to Private Mortgage Insurance (which is not required with a VA Loan)
Important Notes About Funding Fees
The following gives you background on the funding fees and how they are assessed (if applicable):
- The funding fee can be waived if you have a 10% VA disability rating or greater, or, starting in 2020, a Purple Heart award.
- The funding fee depends on the type of transaction (purchase, refinance, or loan assumption), amount of your down payment (if any), the number of times you have used the VA Loan, and your service category (Active or Reserve Component).
- This fee can be paid at closing or rolled into the purchase price — allowing the veteran to buy the house with no down payment.
It’s important to be aware of these fees, and account for them when comparing a conventional and VA Loan.
If the VA funding fee is waived, then a VA Loan will often come out better than a conventional mortgage. If you have to pay the funding fee, then you will want to compare the total cost of each loan to determine which is the best for you.
VA Loan Funding Fee Chart – 2020 And After
The VA changed the VA Loan Funding Fee schedule starting on Jan. 1, 2020. Some background: In 2019, Congress passed the Blue Water Navy Vietnam Veterans Act that created additional benefits for Vietnam Era veterans, in addition to making changes to the VA Loan program.
The two primary changes to the VA Loan program include the removal of VA Loan purchase price limits and an increase to VA Loan Funding Fees. The legislation also exempted the funding fee for current service members who have received a Purple Heart for wounds received in combat. This exemption is in addition to the waiver for veterans with a service-connected disability rating of 10% or greater.
The previous VA Loan Funding Fee charts also separated the funding fee amount based on the service member’s type of service — whether the veteran qualified for a VA Loan through active-duty service or service in the Reserve Component. The new Funding Fee tables do not make a distinction between service types.
These changes went into effect on Jan. 1, 2020.
| Type of Loan | Down Payment | Funding Fee First Time Use | Funding Fee Subsequent Use |
|---|---|---|---|
| Purchase / Construction Loan | 0% | 2.3% | 3.6% |
| Purchase / Construction Loan | 5% | 1.65% | 1.65% |
| Purchase / Construction Loan | 10% | 1.40% | 1.40% |
| VA Cash-Out Refinance | N/A | 2.3% | 3.6% |
| IRRRL Streamline Refinance | N/A | .50% | .50% |
| VA Loan Assumption | N/A | .50% | .50% |
VA Loan Funding Fee Chart — 2019 and Previous Years
Here are the current VA Loan Funding Fees for active-duty, and Guard/Reserves, for each type of home purchase or refinance:
- First and subsequent home purchases
- Cash out refinancing
- Other types of VA Loans (IRRRL, Manufactured Homes, and Loan Assumptions)
VA Loan Funding Chart for Home Purchase
| Type of Veteran | Down payment | Percentage for First time Use | Percentage for Subsequent Use |
|---|---|---|---|
| Regular Military | None | 2.15% | 3.3%* |
| 5% or more | 1.50% | 1.50% | |
| 10% or more | 1.25% | 1.25% | |
| Reserves/National Guard | None | 2.4% | 3.3%* |
| 5% or more | 1.75% | 1.75% | |
| 10% or more | 1.5% | 1.5% |
The VA Loan Funding Fee Chart above shows the required funding fee, based on your type of military service, the amount of your down payment and whether or not it is the first time you use the VA Loan or a subsequent home purchase using the VA Loan.
*The higher subsequent use fee does not apply to these types of loans if the veteran’s only prior use of entitlement was for a manufactured home loan.
VA Loan Funding Chart — Cash Out Refinance
| Type of Veteran | Percentage for First time Use | Percentage for Subsequent Use |
|---|---|---|
| Regular Military | 2.15% | 3.3%* |
| Reserves/National Guard | 2.4% | 3.3%* |
*The higher subsequent use fee does not apply to these types of loans if the veteran’s only prior use of entitlement was for a manufactured home loan.
Other Types of VA Loans:
| Type of Loan | Percentage for Either Type of Veteran Whether First Time or Subsequent Use |
|---|---|
| IRRRLs | .50% |
| Manufactured Home Loans (NOT permanently affixed) | 1.0% |
| Loan Assumptions | .50% |
Of note is the funding fee for a VA Interest Rate Reduction Loan (IRRRL), or Streamline Refinance.
A Streamline Refinance is a quick and easy way to refinance your home at a lower interest rate, and potentially, save thousands of dollars in interest.
However, you should note there is a 0.5% funding fee associated with the IRRRL unless you qualify to have the funding fee waived.
This VA Interest Rate Reduction Loan case study explains how you can use this program more than once to shave percentage points off your loan.
How VA Loan Funding Fees Work on a Mortgage
For the calendar year 2019 and previous years, the VA Loan funding fee varies based on your qualifying service. Military members and veterans who qualify for the VA loan based on active-duty service have slightly lower funding fees. Starting in 2020, the funding fee will be the same regardless of service type.
Funding Fees for Regular Military Service
The funding fee for active-duty qualifying service is currently assessed at 2.15% of the home’s purchase price for veterans who are using a VA Loan for the first time and don’t put any money down.
Veterans buying a home without a down payment and using a VA Loan for a subsequent use are required to pay a 3.3% funding fee.
For example, a $200,000 house purchase with no down payment would require a $4,300 funding fee for a first-time VA Loan user, and $6,600 for a subsequent VA Loan user.
Making a down payment will reduce the funding fee and the money you need to purchase your home.
Funding Fees for Qualifying Service Through Guard or Reserves
Guard and Reserve members can also qualify for VA Loan eligibility based on their time in service.
The funding fees for Guard and Reserve members are slightly higher, coming in at 2.4% for a first-time user, with no down payment, or 3.3% for subsequent use, with no down payment.
You can reduce the funding fee by increasing your down payment to a minimum of 5% of the purchase price.
How to Reduce VA Loan Funding Fees
Borrowers who make a down payment may be entitled to a reduction in their VA Loan funding fees.
A down payment of 5% will result in a first-time funding fee of 1.5%, greater than 10% will be 1.25% of the loan.
The funding fees are the same for military members and veterans who use the VA Loan more than once.
Members of the Guard/Reserves may pay a 2.4% fee for first-time use with no down payment, a down payment of 5% but lower than 10% requires a 1.75% fee and a down payment of 10% or more comes with a 1.5% funding fee.
Guard/Reserve veterans using the VA Loan a subsequent time are required to pay a 3.3% funding fee if they are not making a down payment, a 1.75% fee for a down payment up to 10% and a 1.5% funding fee for a 10% or greater down payment.
VA Loan Funding Fee Exemptions
There are some exemptions for the funding fee — for example, veterans may be exempt if they meet any of the following criteria:
- The veteran receives service-connected disability compensation from the VA.
- The veteran would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay.
- A service member who would be eligible for disability benefits, but is currently serving in the military.
- Active service members who have been deemed eligible to receive disability compensation based on a pre-discharge medical exam or review (this only occurs during the military retirement or discharge process).
- Service members and veterans who are Purple Heart recipients will also be exempt from the VA Loan funding fee, starting on Jan. 1, 2020.
- Surviving spouses of veterans who died in service or from service-connected disabilities may be exempt from paying VA Loan funding fees.
Be sure to speak with your VA Loan lender if you believe you may be eligible to have the VA Loan funding fee waived.
If you are eligible for this exemption, you will need to provide documentation of your VA disability to your waiver.
You can accomplish this by contacting your regional VA center with your lender’s information and they will fax the appropriate documents to your lender.
Allow for approximately one business week for this, though in some cases it can be accomplished within a day or two.
Understanding VA Loan Funding Fees Helps You Compare VA Loans and Conventional Mortgages
The VA Home Loan funding fees can make a big difference in the bottom line, and in some cases, might equalize the closing costs if you were to use a conventional loan.
The best way to compare a VA Loan to a conventional loan is to list all associated costs, determine your down payment and decide which option is best for your specific situation.
You should compare the:
- Interest rate (VA Loan vs Conventional Mortgage)
- VA Loan funding fee
- Private Mortgage Insurance (if using a conventional mortgage with a down payment less than 20%)
- Closing costs (Conventional Mortgage Only)
- Other costs
If you are making a large down payment (20% or more), then you can probably make a case for either loan.
If your down payment is small, or non-existent, then it may be best to go with a VA Loan. Just keep in mind that the larger your mortgage, the larger the funding fee.
If you are not making a downpayment and the amount you are borrowing is pushing the VA Loan limits, you may have to pay a large funding fee.
Again, run the numbers for your situation, and see which option is best.
Equal Housing Opportunity. The Department of Veterans Affairs affirmatively administers the VA Home Loan Program by assuring that all Veterans are given an equal opportunity to buy homes with VA assistance. Federal law requires all VA Home Loan Program participants – builders, brokers, and lenders offering housing for sale with VA financing – must comply with Fair Housing Laws and may not discriminate based on the race, color, religion, sex, handicap, familial status, or national origin of the Veteran.
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Ronald W. Davis says
I will shortly be entering into my 3rd VA loan. This means that I have already paid two funding fees. As the purpose of the funding fee is stated to defray taxpayer costs in the event of non-payment of the loan, haven’t I already done that twice.
I have never never missed a payment–never do on anything. Hasn’t enough money been paid for the taxpayer guarantee?
Since the funding fee is a percentage of the loan amount, perhaps the only fee that should be considered is the difference between the refinance and the original loan amount.