One of the biggest advantages of VA loans is that they don't require a down payment, but there is a one-time cost that catches some Veterans by surprise: the VA funding fee. The VA funding fee is a one-time payment that helps sustain the VA loan program for future generations of Veterans.

The fee typically ranges from 0.5% for an Interest Rate Reduction Refinance Loan (IRRRL) to 3.3% of the loan amount depending on whether it's your first time using the benefit, and your down payment amount, though many Veterans are exempt from paying it and those who do can roll it into their loan rather than paying out of pocket. 

Understanding how this fee works can help you budget accurately and avoid confusion during the home-buying process.

What is the VA Funding Fee?

The VA funding fee is a one-time charge paid to the Department of Veterans Affairs that helps offset the cost of the VA loan program to taxpayers. Because VA loans don't require down payments or monthly mortgage insurance, and because the VA guarantees a portion of each loan against default, the program carries costs that need funding.

The fee keeps the program running without requiring Congressional appropriations. The funding fee costs less out of pocket at closing than a conventional mortgage, and many Veterans don't pay it at all due to exemptions.

The funding fee amount varies based on several factors. It's not a flat rate for everyone, so understanding what applies to your situation helps you calculate your expected costs.

Factors That Determine Your Fee

• First-time vs. subsequent use: Your first time using a VA loan comes with a lower fee than subsequent uses.
• Down payment amount: Making a down payment of 5% or 10% or more reduces your funding fee, even though VA loans don't require any down payment.
• Loan type: Purchase loans, cash-out refinances, and Interest Rate Reduction Refinance Loans (IRRRLs) have different fee structures.

Calculating Your Fee

Let's look at an example. Say you're buying a $300,000 home with no down payment and it's your first time using your VA benefit. Your funding fee would be 2.15% of $300,000, which equals $6,450.

If you put down 10% ($30,000), your loan amount drops to $270,000, and your funding fee rate drops to 1.25%. That's $3,375, a savings of $3,075. However, you're also putting $30,000 down, so you need to weigh whether that tradeoff makes sense.

Who is Exempt from the Funding Fee?

Many Veterans don't pay the funding fee at all. If you qualify for an exemption, this cost simply disappears from your loan.

Veterans Receiving VA Disability Compensation: If you're receiving VA disability compensation for a service-connected disability, you're exempt from the funding fee. 

Purple Heart Recipients: Veterans who have received the Purple Heart are exempt from paying the funding fee.

Surviving Spouses: Surviving spouses of Veterans who died in service or from service-connected disabilities are exempt from the funding fee.

How to Claim Your Exemption

If you qualify for an exemption, make sure your lender knows. You'll need to provide documentation of your disability rating, Purple Heart award, or surviving spouse status. Your lender will verify your exemption with the VA before finalizing your loan.

Paying the VA Funding Fee

Most Veterans who owe the funding fee don't pay it out of pocket at closing. You have options for how to handle this expense.

Rolling It Into Your Loan

The most common approach is financing the funding fee by rolling it into your loan amount. This means the fee gets added to your mortgage balance, and you pay it off over the life of the loan with interest.

If you're borrowing $300,000 and owe a $6,450 funding fee, your total loan amount becomes $306,450. Your monthly payment increases slightly, but you don't need to come up with $6,450 at closing.

Paying Out of Pocket

You can choose to pay the funding fee at closing rather than financing it. This reduces your loan amount and long-term interest costs, but requires having that cash available.

Seller Concessions

In some cases, sellers can contribute toward your closing costs, including the funding fee. Sellers can pay up to 4% of the home price toward your costs. If negotiated into your purchase agreement, seller concessions can cover all or part of your funding fee.

Comparing the Funding Fee to Conventional Loan Costs

While the funding fee might seem like a lot, it's helpful to compare it to what you'd pay with conventional financing.

Down Payment Comparison

Conventional loans often require 20% down. On a $300,000 home, that's $9,000 to $60,000 upfront. The VA funding fee is less than even the minimum conventional down payment you'd need to pay in cash.

Private Mortgage Insurance (PMI)

Conventional buyers who put down less than 20% must pay PMI, which typically costs 0.5% to 1% of the loan amount annually. On a $300,000 loan, that's $1,500 to $3,000 per year until you reach 20% equity. VA loans don't require PMI ever, regardless of your down payment. 

Impact on Your Loan Amount and Entitlement

When you finance the funding fee, it affects your loan amount and potentially your entitlement calculation.

Loan Amount Considerations

Financing the fee means your total loan amount exceeds the purchase price. Buying a $300,000 home results in a $306,450 loan. This is allowed and normal with VA loans.

However, ensure your loan amount doesn't exceed VA loan limits for your area if you're using basic entitlement. Veterans with full entitlement don't need to worry about this as much.

Entitlement Usage

The amount of entitlement the VA uses includes the funded fee. The VA guarantees a portion of the $306,450 loan, not just the $300,000 purchase price. This matters if you're planning to use your entitlement again before selling this property.

Special Situations and Considerations

Loan Assumptions

If someone assumes your VA loan, they typically must pay a 0.5% funding fee.

Refinancing Multiple Times

Each time you refinance with a VA loan, you pay the applicable funding fee unless you're exempt. If you do multiple IRRRLs over the years, you'll pay the 0.5% fee each time. Factor this into your decision about whether refinancing makes financial sense.

Manufactured Homes

Funding fees for manufactured homes follow the same structure as site-built homes.

Tips for Managing the Funding Fee

There are various ways to make the funding fee easier to pay.

Apply for VA Disability if Eligible

If you have service-connected conditions but haven't applied for VA disability compensation, consider doing so before getting a VA loan. Even a low rating exempts you from the funding fee. The application process takes time, so start early if you're planning to buy a home.

Consider Down Payment Tradeoffs

Run the numbers on whether making a down payment to reduce your funding fee makes sense. 

Understand Your Loan Type

Interest Rate Reduction Refinance Loans (IRRRLs) have much lower funding fees than purchase loans or cash-out refinances. If you're considering a refinance, understand which type you're doing and what fee applies.

Keep Documentation Ready

If you're exempt from the fee, have your documentation organized and ready to provide to your lender immediately. Being proactive ensures the exemption is applied correctly from the start.

The Bottom Line on VA Funding Fees

Most Veterans pay far less overall with a VA loan than they would with conventional financing once you factor in down payments and PMI. For Veterans exempt from the fee, VA loans become even more advantageous. If you qualify for an exemption, make sure your lender applies it correctly.

Get started online today to explore your VA loan options and learn exactly how the funding fee applies to your situation.

FAQs

Can I get a refund of the VA funding fee if I become disabled after closing?

No. The funding fee is assessed at closing based on your status at that time. If you receive a disability rating after closing, you cannot get a refund of the fee you paid. 

Is the VA funding fee tax-deductible?

No, the VA funding fee itself is not tax-deductible. However, when you finance the fee, the interest you pay on that portion of your loan is deductible as part of your mortgage interest deduction. Consult with a tax professional about your situation.

Do I pay the funding fee again if I refinance?

Yes, most refinances involve a new funding fee. 

Can the funding fee be waived based on financial hardship?

No, the funding fee rates are set by law and cannot be reduced or waived based on financial hardship. The only way to avoid the fee is to qualify for one of the exemptions. 

What happens to the funding fee if my loan doesn't close?

If your loan is denied or you cancel before closing, you don't pay the funding fee. The fee is only charged when the loan actually closes.