VA
Funding Fee

The VA funding fee is a one-time payment required for most VA home loans, designed to help sustain the VA loan program and reduce costs to U.S. taxpayers. It applies to both purchase and refinance loans and is a percentage of the loan amount. This fee replaces the need for private mortgage insurance (PMI) and allows the VA to continue offering benefits such as no down payment and competitive interest rates. While the VA funding fee is mandatory for most borrowers, its amount depends on several factors, including the type of loan, the borrower’s down payment, and whether it is the borrower’s first or subsequent use of a VA loan benefit.

The type of loan affects the funding fee. For example, purchase loans and construction loans typically have lower funding fees compared to cash-out refinance loans. Interest rate reduction refinance loans (IRRRL), which are used to lower the interest rate on an existing VA loan, often have the lowest funding fees. The specific percentage is determined by the VA and periodically updated, so borrowers should check the current rates for their loan type.

The number of times the VA loan benefit has been used also influences the funding fee amount. For a first-time VA loan user with no down payment, the funding fee is typically 2.3% of the loan amount. For subsequent uses, this fee increases to 3.6% for borrowers putting down less than 5%. These percentages decrease if the borrower makes a larger down payment (e.g., 5% or 10%), which reduces the risk to the lender and lowers the funding fee as a result.

A significant factor that affects the VA funding fee is whether the borrower has a service-connected disability. VA borrowers who are eligible for disability compensation are exempt from paying the funding fee altogether. This exemption applies regardless of the percentage of disability rating and offers a substantial financial benefit to disabled veterans. To qualify, the VA must confirm the borrower’s disability status before the loan closes.

For disabled veterans who are unsure of their exemption status, it’s essential to confirm eligibility with the VA or provide proof of their service-connected disability to the lender. If the borrower initially pays the funding fee but later receives confirmation of eligibility for exemption, the VA allows a refund of the fee. This refund can either reduce the loan balance or be returned to the borrower directly.

Understanding the VA funding fee and how it varies can help borrowers make informed decisions about their home financing options. Disabled veterans, in particular, should ensure their exemption status is properly documented to avoid unnecessary costs. The VA funding fee, while a cost for most borrowers, is an essential part of maintaining the benefits that make VA loans an attractive and accessible option for those who have served.