Buying a home with a VA home loan is a privilege earned by America’s service members, but sometimes there is confusion about how it works. For instance, “What is the VA funding fee? How much is it? Are there options to lower or get rid of this cost?” We are going to set the record straight in explaining the purpose, amounts, advantages, and possible exemption from this cost.
What is a VA Funding Fee?
The funding fee is a cost charged to a VA loan borrower for two main reasons. First, the fee helps offset the Veterans Administration costs and losses resulting from foreclosures. It lowers the cost to the taxpayer. Secondly, a VA funding fee is a form of mortgage insurance. Rather than charging a monthly PMI, VA only has the one-time funding fee. The amount varies based on the number of uses, down payment percentage, 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?
VA Funding Fee Financed
With an up-front charge ranging from 1.25% – 3.3%, this could significantly affect a VA borrower’s pocketbook. Luckily, VA allows the funding fee to be added on top of the base loan. For instance, a first time VA buyer in the Navy with no money down on a $200,000 purchase price, would borrow $204,300. $200,000 plus adding 2.15% funding fee ($4,300) results in the total $204,300 loan amount. Unless directed, this fee is automatically added on top.
VA Funding Fee Partially Financed
A fairly common question is “Can the borrower or seller pay the funding fee rather than adding to the loan amount?” Well, the answer is “yes.” Either could pay the funding fee in full or even partially. Sometimes, there are leftover sales concessions on a VA purchase. Rather than a buyer leaving those funds on the table, these seller paids may contribute to lowering the financed Veterans Administration funding fee. Occasionally a borrower just doesn’t want to finance the fee. In this case, the borrower may bring these funds to closing. Another idea is a seller or builder may even provide a marketing incentive by offering to pay a buyer’s funding fee.
VA Funding Fee For Purchases
|Veteran Type||Down Payment||for 1st Time Use||for Following Use|
5% or more
10% or more
5% or more
10% or more
VA Funding Fee For Regular or Cash Out VA Refinance
Note: Regular or cash out refinances do not allow for a reduction of VA funding fees. Reduced fees only apply to purchase loans where a down payment of at least 5 percent is made.
|Veteran Type||For 1st Time Use||For Following Use|
*The higher subsequent use fee mentioned above does not apply to these types of loans if the Veteran’s only prior use of entitlement was for a manufactured home loan.
VA Funding Fee for IRRRL, Manufactured Homes Not Affixed to Land & Loan Assumptions
|Type of Loan||Percentage for Either Type of Veteran Whether First Time or Subsequent Use|
Loans (NOT permanently affixed)
As mentioned above, the funding fee may range from 1.25% to a maximum of 3.3% of the base loan amount. Looking at the charts, realize that the fee varies based on the following characteristics…How Much is the VA Funding Fee?
- First time or subsequent use
- Service category – Regular military or National Guard/Reserves
- Level of down payment – 5%, 10%, or no money down
- Purchase, regular refinance, or VA IRRRL
In reviewing the charts, a borrower may determine the amount of this charge. Notice that a service member in the Reserves or National Guard typically pays a .25% higher fee. Again, the fee is typically added on top of the loan, so the borrower is not required to pay it out of pocket. Although, it is allowed to be paid rather than financed over the term of the loan. Not sure which fee matches your scenario? No worries! An OVM Financial loan officer, who are experts in VA loans, will calculate this for you.
Using the VA Certificate of Eligibility to Determine the VA Funding Fee
VA lenders need to verify each of the characteristics above to figure the correct fee. The type of loan and the down payment will be obvious, but the first two items must be verified. That’s where the VA lender will request a borrower’s certificate of eligibility or COE. The COE provides lenders with valuable information to help structure the VA loan correctly for the borrower. Examples of information provided on the COE are the following:
- First or subsequent use
- Entitlement available / used
- Entitlement code
- VA Funding fee exempt or not
- If entitlement is tied up & how much
- Existing VA loan amounts
- Prior VA loss through foreclosure or short sale
- Service category – regular service or reserves/National Guard
Sounds like a lot, doesn’t it? Again, with a little information, we will request this information for the borrower. Then determine the level of funding fee. Although, there are cases where the borrower is exempt from the VA funding cost.
VA Funding Fee Exemption
That’s right! Not everyone has to pay this fee. There are three scenarios in which the VA funding fee is waived. The Veteran’s Administration lists these exceptions like the following:
- 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
In a case where there is no funding fee on top of already having no monthly mortgage insurance, it would be rare to choose another loan option over a VA loan. Borrowing 100% of the purchase price without any form of PMI? Where do I sign up, right?
Additional VA Home Loan Benefits
Hopefully, we have explained the VA funding fee calculation sufficiently. Additionally, how it is not only a benefit to the VA borrower but also to the taxpayer. VA home loans have many other benefits. Here is a list of several:
- Flexible credit requirements
- Have multiple VA loans at once
- VA jumbo loans for higher priced homes
- Potential no money down
- Seller may pay all closing costs
- Seller may pay up to 4% sales concessions – learn how to use this strategy as a buyer or seller!
- Easier to qualify with student loan debt
- Streamline refinance option with easier qualifications
- Refinance with cash out up to 100% of the appraised value
- Construction and VA perm loans up to 100%
To find out if you qualify for a VA home loan and to determine the amount, contact OVM Financial today. Give us a call, message, or apply online now. You will find our knowledge, service, and communication will far exceed your expectations!