One of the first options military members consider for a home purchase is their right to apply for a VA home loan.
The VA loan's affordability makes it an attractive option. No down payment or private mortgage insurance is required.
However, even for homebuyers who have used a VA loan before, it can be overwhelming to wade through the details of the loan's fees.
One such item in the VA home loan process is the funding fee. This fee is applied to almost every VA purchase and refinance loan, with only a few exceptions.
Details of the Funding Fee
"If you're using a VA home loan to buy, build, improve, or repair a home or to refinance a mortgage, you'll need to pay the VA funding fee unless you meet certain requirements," according to the Department of Veterans Affairs.
The funding fee offsets costs that occur due to VA guaranteed loans that default.
The funding fee also helps relieve U.S. taxpayers of the full burden of backing the loans.
The Department of Veterans Affairs receives all of the funding fees to assure future availability of VA loans to service members.
The amount of the funding fee depends on several factors, including the details of the military member's service, whether a down payment is applied, and the number of times the loan benefit has been used.
Active-duty service members traditionally pay the lowest funding fees among their military peers, National Guard members and reservists.
"While most Veterans pay 2.3%, this fee ranges from 0.5% to 3.6%," according to Veterans United, a VA lender.
Here's a breakdown from the VA of how the fee is calculated.
To give an example of a typical scenario, for a $400,000 home purchase with a 5% down payment, the homebuyer would pay a $9,200 funding fee.
The funding fee applies only to the loan amount, not the purchase price of the home.
Funding Fees and VA Refinance Products
If the service member already has a VA loan, two refinance options are available that require funding fees: the Interest Rate Reduction Refinance Loan (IRRRL) and the cash-out refinance.
The Interest Rate Reduction Refinance Loan (IRRRL)
IRRRLs are designed to help VA homeowners lower their mortgage rates or to exit an adjustable rate loan. These loans are also called "Streamline" or "VA to VA."
Unless exempt, homeowners who take an IRRRL pay a 0.5% funding fee.
The number of times the VA home loan benefit has been used, and the details of the member's service, do not come into play here.
With an IRRRL, the funding fee is the only cost required by the VA. It may be paid in cash or included in the loan.
Read More: IRRRL Facts for Veterans
The Cash-Out Refinance
Cash-out refinance fees are similar to those of a typical VA purchase, but the borrowers are not eligible to lower their funding fees by using equity or making a down payment.
Read More: Cash-Out Refinance
Can the Funding Fee Be Waived?
Yes. There are several official circumstances that allow the funding fee to be waived. The VA also has the right to examine and research out-of-the-norm requests for funding fee exemptions.
If you're receiving disability compensation each month, let your loan officer know so you can get the appropriate exemption.
Funding Fee Exemption Eligibility
In more detail, these are the homebuyers who don't have to pay funding fees:
- Any veteran receiving VA compensation for a service-connected disability
- Veterans who would be entitled to receive compensation for a service-connected disability if they did not receive retirement or active-duty pay
- Surviving spouses of veterans who died in service or from a service-connected disability, or who were totally disabled and they're receiving Dependency and Indemnity Compensation (DIC)
- A service member with a proposed or memorandum rating, before the loan closing date, stating that they are eligible for compensation because of a pre-discharge claim
- A service member on active duty who, before or on the loan closing date, provides evidence of having received the Purple Heart
If you think you're eligible for a refund, contact your VA regional loan center at 877-827-3702 during weekdays, 8 a.m. to 6 p.m. ET.
If the veteran's exempt status cannot be verified prior to loan closing, the funding fee must be paid as if the borrower was not exempt.
Read More: VA Loan Requirements
How Do I Pay the Funding Fee?
The lender verifies the funding fee status as part of the mortgage approval process.
"Lenders must not advise Veterans who believe they are exempt from paying the funding fee to close on a loan without first establishing their funding fee exemption status," the VA states.
The certificate of eligibility (COE) that the VA sends determines whether any funding fee is due. The VA added funding fee status to the COE in 2011.
The lender then collects the funding fee during the loan's closing.
Because the fee is likely thousands of dollars, most borrowers choose to finance the funding fee and roll it into the loan, but they can also pay cash or ask the seller to pay.
VA Funding Fee Rate Charts
VA-Backed Purchase and Construction Loans
Rates for veterans, active-duty service members, and National Guard and Reserve members. (For construction loans only, equity in the secured property counts as a down payment for calculating the funding fee):
| Down payment | Funding fee | |
| First use | Less than 5% | 2.3% |
| 5% or more | 1.65% | |
| 10% or more | 1.4% | |
| After first use | Less than 5% | 3.6% |
| 5% or more | 1.65% | |
| 10% or more | 1.4% |
VA-Backed Cash-Out Refinancing Loans
Rates for veterans, active-duty service members, and National Guard and Reserve members:
| First use | After first use |
| 2.3% | 3.6% |
Other VA Home Loan Types
| Loan type | Funding fee |
| Interest Rate Reduction Refinance Loans (IRRRLs) | 0.5% |
| Manufactured home loans (not permanently affixed) | 1% |
| Loan assumptions | 0.5% |
| Vendee loan, for purchasing VA-acquired property | 2.25% |
Funding fee charts source: VA.gov (effective Jan. 1, 2020)
Funding Fee FAQ
How Can I Reduce My Funding Fee?
As illustrated in the charts above, making a down payment of at least 5% will reduce your funding fee.
A VA home loan does not require a down payment. But for a first-time user of such a loan, making a 5% down payment will drop the funding fee from 2.3% to 1.65%.
Making a down payment of 10% will drop the funding fee even lower, to 1.4%.
Do Sellers Ever Pay Funding Fees?
Yes, a payment of the home buyer's VA funding fee is sometimes included in a home purchase contract as a seller concession. This is an item that your real estate agent can help you negotiate.
Who Controls the Funding Fee?
The funding fee was put in place by the U.S. Congress, which also controls the rates. Congress also sets the length of the funding fee.
What if I Believe I Overpaid in Funding Fees?
Lenders and servicers must initiate a request in the Funding Fee Payment System (FFPS) within three business days from being notified by the VA or the veteran of an overpayment of the funding fee to include a request for a retroactive refund.
If a veteran is overcharged for a funding fee, they'll get a cash refund if they paid cash, or the overpayment will be applied to the loan balance if they financed the fee.
What Happened with VA Funding Fees in 2019?
In late 2019, the VA completed an initiative to issue more than $400 million in funding fee refunds to veteran borrowers, after a review of millions of VA-backed home loans spanning almost two decades.
The veterans had been mistakenly charged a funding fee on their loans.
A report by the VA's inspector general concluded that from 2012 to 2017, the VA had improperly charged disabled veterans funding fees despite their exempt status.
How Do I Find the Right Lender?
Purchasing a home with a VA loan is a time-consuming and often misunderstood process for not only the borrowers, but also real estate and mortgage professionals who do not have an abundance of experience working with the VA. It is highly recommended to research and ask for referrals for both providers.
A great first step is to find a lender experienced in VA loans. Our tool will match you with up to five rates from different lenders, letting you weigh the financial and nonfinancial factors with each (such as customer service).
How Would My Lender Verify My Exempt Status?
If you believe you are exempt from the funding fee, your lender will help submit the proper paperwork. A lender must verify exempt status by obtaining one of the following:
- A properly completed and signed VA Form 26-8937, Verification of VA Benefits, indicating the borrower's exempt status
- For a veteran who elected service retirement pay instead of VA compensation, a copy of the original VA notification of disability rating and documentation of the veteran's service retirement income, or
- Indications on the certificate of eligibility (COE) that the borrower is entitled as an unmarried surviving spouse.
What About Surviving Spouses?
The lender does not have to submit documentation if the borrower is an eligible surviving spouse, or if the documentation had been previously provided to the VA with the loan application as verification of the veteran's income.
What if I Was Awarded a Purple Heart?
Only active-duty service members are eligible for funding fee waivers when taking out a VA home loan. If you leave the service, or ETS, before your house closing date, you must pay the funding fee unless you're otherwise exempt.
If possible, speak to your lender about adjusting your closing date prior to your ETS.
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MilitaryByOwner contributed to this report.
