The Department of Veteran’s Affairs (VA) offers eligible veterans and servicemembers a special loan guaranty called the VA loan. The VA loan guaranty allows the eligible veteran to go to any VA-approved lender and apply for a loan that the VA will guarantee, either the whole thing or at least a significant portion. A VA guarantee means that the VA promises the lender that if the borrowing veteran defaults on the loan, the VA will make good on the remaining balance. As part of this program, borrowing veterans are charged a VA funding fee when they close a loan with a VA approved lender. But what is this funding fee? Why does it exist? When is it charged? and How much will it cost?
The VA funding fee is a certain amount the VA charges the veteran in exchange for guaranteeing a significantly larger amount on behalf of the veteran. The amount that a borrowing veteran saves on the favorable terms of a VA-guaranteed mortgage far exceeds the amount that is asked for in the VA funding fee. The VA funding fee is different from Mortgage Insurance Premiums (MIP) which are not charged on a VA loan, even if there is no down payment. Instead, the amount of the VA funding fee changes based on the amount of the down payment.
So why does the VA Loan funding fee exist? The funding fee exists because the money the VA pays anytime a veteran defaults on a mortgage has to come from somewhere. The VA loan program is supported in part by taxpayer dollars, but anyway there is to help make the program more self-sustainable, the VA is interested in. Why? Because it’s less likely to get cut in times of budgeting. If the VA can show that their Loan Guaranty program covers a significant chunk of its own expense and only relies a little on taxpayer dollars, the VA Loan program is more likely to survive and continue to be able to help veterans get homes when they otherwise might not be able to afford it. So the funding fee you pay for your VA loan is contributing to the program’s existence.
So when does the VA funding fee need to be paid? Typically, the VA funding fee is due at the time of closing of the loan. The fee can be paid in one lump sum or financed, but it must be paid (or the first payment made) at the closing of the loan. It takes place at this time because the VA needs the funding fee before they can guarantee the loan. By having the funding fee due right at the time of closing the loan, the VA can make sure they are covered in case of a default by the borrower, no matter when that default occurs.
So how much is the VA funding fee? That depends…. It depends on a variety of factors, including the amount of the down payment (as mentioned above), as well as the status of the borrower. Some borrowers are actually exempt from the funding fee completely. We’ll talk about those in a second. For those who are not exempt from the funding fee, the amount of the funding fee depends on whether you are/were a full-time service member or a guard/reservist, and how large the down payment on the loan is. The lowest amount of a funding fee charge that a veteran can get is 1.25% of the total amount of the mortgage. He or she can get that amount if they make at least a 10% down payment. For a guard/reservist, the lowest amount is 1.5%. If there is less than a 5% down payment made, the funding fee is 2.15%, and for guard/reservists, it is 2.4%.
You may be exempted from the VA funding fee under a variety of circumstances. If you are currently receiving disability checks from the VA, you are exempt. Also, if you would be receiving disability if you weren’t receiving retirement pay or active duty pay, or if you are a surviving spouse of a veteran who died of a service-connected disability. These exemptions have to be evidenced to the VA through a VA form 26-8937. It’s always good to check with a VA-approved lender to find out what your specific options are.