Whether buying or refinancing a home, it’s important to understand closing costs and how to lower them. This is no different when it comes to VA loans.
Individually, the financed VA funding fee is usually the largest VA loan closing cost paid by a Veteran. Fortunately, the Veterans Administration allows VA borrowers to include this fee in the loan amount rather than bringing it to closing. Depending on the transaction type, the VA funding fee ranges from .5% – 3.3% of the loan amount. That amount makes a difference in a Veteran’s loan amount, but what if I told you that there is a way for Veterans, specifically disabled Veterans, to take advantage of a VA funding fee exemption?
That’s right, no funding fee. Even though Veterans are not required to bring this fee to closing, an exemption could save thousands! As a bonus, we will share another potentially huge savings for disabled Veterans.
What is the VA Funding Fee?
The VA funding fee, based on a percentage of the loan amount, has two main purposes. The first helps to cut the VA loan program monetary losses from foreclosures, which lowers the burden on taxpayers. Then, the one-time, up-front fee is a form of mortgage insurance. Traditionally, mortgage insurance is known as a monthly fee paid by the borrower to protect lenders in case of foreclosure losses. FHA and USDA loans charge both an up-front and a monthly MI, but VA loans only charge the up-front fee. Since there is only one fee, it lowers a Veteran’s monthly payment compared to other low down payment programs.
There are four primary factors which determine this VA fee level. They are the number of uses (first time or subsequent use), down payment percentage, loan type, and service category. Further down, we will explain how each may affect the fee amount. So, how does the Veteran pay for this VA cost?
As mentioned above, the VA funding fee is a closing cost which is customarily financed on top of the loan amount. If a Veteran buys a $200,000 house using a no money down VA loan for the first time, the fee may be 2.15% of $200,000 or $4,300. So, the loan amount increases to $204,300 to cover the funding fee. Below, we provide charts which explain the various levels.
VA Funding Fee Exemption
Now you know the basics of this VA loan closing cost, but you are reading this to see how to avoid the fee. Right? Well, there are three ways to avoid this fee. The Veterans Administration defines these funding fee exceptions as:
- A Veteran receiving VA compensation for a service-connected disability
- A Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
- Surviving spouse of a Veteran who died in service or from a service-connected disability
So, Veterans considering a VA loan should compare their status with the above. If there is a still a question related to the VA funding fee exemption qualification, ask an OVM Financial loan officer. We can request a VA certificate of eligibility to determine if there is a funding fee, how much, or if the borrower may be exempt.
If a Veteran qualifies for the VA funding fee exemption, they would have access to potentially no money down loan, no funding fee, and no monthly mortgage insurance. That is quite a deal, and it would be very tough for any other loan option to compete.
VA Funding Fee Chart for Purchases
|Veteran Type||Down Payment||First Time Use||Following Uses|
|5% or more||1.50%||1.50%|
|10% or more||1.25%||1.25%|
|5% or more||1.75%||1.75%|
|10% or more||1.50%||1.50%|
VA Funding Fee Chart for Regular or Cash Out VA Refinances
Notice that VA regular or cash out refinances do not allow for a reduction in the VA funding fee. A reduction in fees only applies to VA purchases with 5% or more down payment.
|Veteran Type||First Time Use||Following Uses|
VA Interest Rate Reduction Refinance Loan – IRRRL
These are streamlined refinances of a current VA loan to a new loan in order to achieve a lower interest rate and/or payment.
|Type of Loan||Fee % for 1st or subsequent users|
VA Funding Fee Exemption Chart – Hint, Exempt Means Free!
|Veteran Type||Loan Type||VA Funding Fee|
Disabled Veterans May Be Exempt from Property Taxes
So, we said we would share another potential savings opportunity for disabled military Veterans. How about no property taxes?! No VA funding fee is pretty cool, but no property taxes or reduced property taxes takes it to another level of savings! Because of the sacrifice made by our 100% disabled Veterans, many states provide at least a discount and often a full property tax exemption.
It is important to understand the rules for the state in which the home is located to determine qualification. This includes the level of discount as well as the process for applying. By clicking on the button below, another article will go into much detail explaining the VA property tax exemption rules.