The VA home loan program offers eligible military personnel the opportunity to purchase a home at a favorable interest rate without the need for a down payment or mortgage insurance. However, in exchange for these benefits, applicants are required to cover the VA funding fee, which is a one-time cost associated with VA loans.
It’s important to understand the details of the funding fee — such as its cost and payment method — so you can properly plan your budget when purchasing a home. Knowing the expenses associated with your VA loan will help you make informed decisions.
What Does the VA Funding Fee Entail?
The VA funding fee is a one-time payment made when closing on a VA loan. It’s paid to the Department of Veterans Affairs (VA) and helps offset the costs associated with the government-backed loan program.
VA loans come with a guarantee that protects lenders in the event that borrowers are unable to repay their loans.
Shirley Mueller from VA Loans Texas in Austin explained that the funding fee enables veterans and service members to access zero-down financing and competitive rates without the need for mortgage insurance.
What Is the Cost of the Funding Fee for Purchase and Construction Loans?
When purchasing a home or opting for a newly built property, the VA funding fee varies depending on your down payment amount and whether you’ve previously used a VA loan.
- First VA Loan (down payment of 5% or more): 1.65% of the loan amount
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First VA Loan (down payment of 10% or more): 1.4% of the loan amount
For example, if you purchase a home for $300,000 with a VA loan and make a down payment, the cost of the funding fee will depend on the specifics of your loan.
What Is the VA Funding Fee for Refinancing?
There are two types of VA refinance loans: Cash-Out Refinances and Interest Rate Reduction Refinance Loans (IRRRLs), also known as VA streamline refinances. The funding fee for these loans varies depending on the type of refinance and whether you’ve used a VA loan in the past.
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IRRRL (VA Streamline): 0.5% for both first-time and subsequent use
Payment Methods for the VA Funding Fee
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Upfront Payment: If you have the funds available, you can pay the funding fee upfront during the closing process.
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Financing the Fee: If you prefer not to pay the fee in full upfront, you can finance it by adding it to your loan amount. This option will result in interest charges on the funding fee, which will increase the overall cost of your mortgage.
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Seller Concessions: You can negotiate with the seller to cover the funding fee as part of the purchase agreement. However, be aware that in some markets, sellers may be reluctant to agree to this, especially if they hold leverage in the transaction. Seller concessions are limited by VA guidelines to no more than 4% of the loan amount.
Exemptions from the VA Funding Fee
Certain individuals are exempt from paying the VA funding fee. These include:
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Veterans with a disability related to their service
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Veterans receiving disability compensation
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Military members with a claim for benefits filed before discharge
VA Funding Fee vs. Private Mortgage Insurance (PMI)
One of the key benefits of a VA loan is that it doesn’t require mortgage insurance, unlike conventional loans that require PMI if the down payment is below 20%.
While the VA funding fee may seem similar to PMI, there are significant differences. The VA funding fee is a one-time charge, whereas PMI is an ongoing expense that continues until you reach 20% equity in your home. Including the VA funding fee in your loan may be a more cost-effective option compared to paying for several years of PMI.
Benefits of a VA Loan
With a VA loan, there is no down payment required, making homeownership more accessible. Additionally, VA loans typically offer competitive interest rates, which can save you money over the life of the loan.
The VA loan process may also be simpler than qualifying for a conventional mortgage. The VA doesn’t set a credit score threshold, and individual lenders may have lower credit score requirements, often as low as 620, or even 580 in some cases.
Ways to Reduce the Cost of Your VA Funding Fee
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Increase Your Down Payment: A larger down payment can lower the funding fee by moving you into a lower fee tier.
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Refinance with an IRRRL: If you already have a VA loan and have financed the funding fee, refinancing with an IRRRL could save you money, as the funding fee for refinances is lower than for purchase and construction loans.
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Negotiate Seller Concessions: Discuss with the seller about covering the funding fee, which could be a way to offset this cost.
Conclusion
If you’re applying for a VA loan, the funding fee is an important cost to factor into your budget. However, the advantages of a VA loan, such as no down payment and competitive interest rates, can make it a great option for qualifying veterans, current service members, and surviving spouses.
If you’re unsure whether a VA loan is the right fit for you, reach out to a real estate agent who can refer you to a lender experienced with VA loans. They can help you navigate the process and find the best option for your needs.
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