The Real Deal with VA Loan Funding Fees
VA loans were developed by the government to empower military veterans to achieve one of their biggest common goals—home ownership. Nowadays, they’re one of only two loan programs that don’t require a down-payment, and they tend to be far more convenient than traditional loans when it comes to applying, processing, and fees.
However, there is one major cost that comes with VA loans: VA funding fees. This is an established and locked-in fee associated with each and every approved VA loan purchase or refinance process, and the funds go to the VA itself to cover losses in case of a loan default. The fee itself varies depending on several factors.
What You Must Know About VA Loan Funding Fees
When a military veteran uses the VA loan program for the first time, a first-time use VA funding fee of 2.15% applies—though this can be lowered by using a different borrower service or by actually contributing a down-payment. If a second VA loan is acquired without down-payment, the funding fee increases to 3.33%. If a subsequent use includes a down payment of at least 5%, the funding fee lowers to 1.5%, and a down payment of 10% or more reduces it further to 1.25%.
There are several categories of military veterans who are kept exempt from ever having to fulfill the VA funding fee. If the veteran in question is receiving compensation for a service-related disability, they can be deemed exempt. If a veteran is entitled to service-connected disability but did not receive retirement pay, they can also be exempt. Lastly, when a veteran has died in service or from service-connected disabilities, their surviving spouses (whether they themselves are veterans or not) can be labeled as exempt from funding fees.
In each case, the VA has final say on what veterans can claim exemption or not. Funding fees are also applied to VA refinance programs, including the Interest Rate Reduction Refinancing Loan or the VA Cash-out refinancing program.
There are two main ways a VA funding fee is applied to a VA mortgage. Foremost is simply rolling it into the loan itself, which can increase the monthly payment. As one example, a 2.5% funding fee on a $200,000 mortgage would increase the monthly payment by $30. Another way is to make it a closing cost, paid in full to finalize the loan itself.