Veterans have access to a great program called VA loans. These loans provide 100% financing for veterans. This means no down payment. Veterans also have access to low closing costs, making the program affordable for them.
Something most veterans can’t get around, though, is the funding fee. Unless you are certified disabled by the VA or you are surviving spouse of a veteran killed during service, you will pay the funding fee.
Just what is the funding fee and how much will you pay? Keep reading to find out.
What is a Funding Fee?
The VA funding fee is how the VA continues to offer VA loans. They use the funding fee to build up reserves that pay for the loans that they have to pay out on. In other words, when a veteran defaults on a loan, the VA has to pay the lender 25% of the defaulted amount. Rather than going to the taxpayers for this money, the VA uses the reserves from the VA funding fee.
Regular military personnel pay 2.15% of their loan amount. So if you took out a $200,000 loan, you would pay $4,300. If you were in the National Guard or Reserves, you would pay a slightly higher fee of 2.4%. On the same $200,000 loan, you would pay $4,800.
Lowering the Funding Fee
You should know, there is a way to lower the funding fee. You may do this by putting money down on the home. Even though the VA loan doesn’t require a down payment, some veterans like to build up a little equity in their home. In exchange for the down payment, they may pay a lower funding fee. The schedule is as follows:
- Down payment between 5% and 10% – Regular military pays 1.5% and National Guard/Reserves pay 1.75%
- Down payment higher than 10% – Regular military pays 1.5% and National Guard/Reserves pay 1.5%.
The benefit of making a down payment is that you build instant equity in your home rather than paying the higher fee towards the funding fee, which you won’t ever see back.
The VA IRRRL Program Has an Even Lower Funding Fee
The bad news is that you’ll pay a VA funding fee even when you refinance your loan. The good news, though, is if you use the VA IRRRL program, you will pay a lower funding fee.
The VA IRRRL program is the Interest Rate Reduction Refinance Loan. This program allows veterans to refinance their current loan with only verification of their mortgage payment history. This means they don’t have to verify their income, assets, or even their credit score. Lenders can even use the original value of your home – you don’t have to pay for a new appraisal!
Even better news is that the funding fee is only 0.5% on this loan program, rather than 2.15% all over again.
You Don’t Get the VA Funding Fee Back
When you sell your home or pay off your mortgage, you won’t get the VA funding fee back. Once you pay this fee, you’ll never see the money. It’s not something that is refunded when you sell the home. It’s a fee for the benefits that the VA offers you. Keep this in mind as you think about refinancing. You’ll pay the fee again, unless it’s a streamline loan. Those fees can add up if you refinance too many times.
You Don’t Have to Pay the Funding Fee at the Closing
If you don’t have the cash to pay the funding fee at the closing, you have two options:
- Ask the seller to pay it – Some sellers are willing to cover certain costs for their buyers, especially if they don’t have a lot of bids on the home. If it means the difference between selling the home or letting it sit on the market, some sellers will go ahead and cover the funding fee for you.
- Wrap the fee into your loan – The VA does allow borrowers to wrap the funding fee into the loan amount. It doesn’t affect your LTV, which means your initial loan amount may be slightly higher than the home’s value.
You May be Exempt From the Funding Fee
Certain veterans and others are exempt from the VA funding fee. This includes:
- Veterans that became disabled as a result of their time in the service (according to the VA)
- Veterans that don’t take disability pay but would be eligible if they weren’t taking retirement pay
- Spouses of veterans that passed away while on active duty or as a result of duty-related incidents
The VA must determine if you are exempt from the funding fee. It will show as such on your Certificate of Eligibility. If you become exempt after you pay the funding fee, the VA will refund you the money based on how you paid. In other words, if you paid cash, they will send you a check. If you wrapped it into your loan amount, they will reduce your principal balance by the amount you paid for the funding fee.
The VA funding fee is what helps the VA continue to offer loans to veterans. Even though it’s an added expense to your loan, the VA doesn’t charge mortgage insurance, which means you save money in the end.Click to See the Latest Mortgage Rates»