Active military members and veterans have access to a great loan program through the VA. With no down payment and flexible guidelines, veterans can become homeowners without paying mortgage insurance or dealing with strict guidelines.
While the VA limits what closing costs veterans can pay, they do require payment of the VA funding fee. While it’s not mortgage insurance and veterans only pay it once for each loan they take out, it’s worth understanding.
Understanding the VA Funding Fee
The VA funding fee, as the name suggests, goes directly to the VA. It’s the fee the VA charges to guarantee the loans for borrowers. The VA keeps the funds in a reserve account. If they must bail a bank out because a veteran defaulted on their loan, the funds come from the reserve account. The VA funding fee also helps the VA stay self-sufficient, not putting the financial burden of the program on the taxpayers.
The big question every veteran wants to know is how much it will cost. The exact cost depends on your down payment (you don’t need one) and your branch of the military. In general, all regular military members with no down payment pay 2.15% of the loan amount. The amount decreases for veterans that make a down payment. If you put between 5% and 9% down on the loan, your funding fee decreases to 1.5%. If you put down more than 10%, it decreases to 1.25%.
If you were in the Reserves or National Guard, you’ll pay a slightly higher fee. If you don’t make a down payment, you pay 2.4% of the loan amount. If you put down between 5% and 9%, your fee decreases to 1.75%. If you make a down payment of 10% or more, you’ll pay 1.5% for the funding fee.
You’ll also pay a VA funding fee if you refinance your VA loan. The VA offers two ways to refinance. The VA Interest RateReductionRefinance Loan or streamline refinance loan costs borrowers 0.5% in a funding fee. The other VA refinance option is the VA cash-out refinance. If you tap into your home’s equity with your refinance, it will cost you 2.15% in a funding fee.
Does Everyone Pay the VA Funding Fee?
For the most part, all veterans pay the VA funding fee. However, the VA does grant a few exceptions
- Disabled veterans – If you became disabled while you are on active duty or as a result of your active duty, you may be exempt from the VA funding fee. In order to do so, you must be declared disabled by the VA. You must also receive disability pay from the VA or be eligible to receive it.
- Spouse of a deceased veteran – If you are a widow of a veteran that died in the line of duty or as a result of his time in the service, the VA exempts the funding fee.
If you think you are exempt from the VA funding fee, but don’t have the right proof from the VA at the time of closing, you’ll have to pay the fee. The VA will refund you the cost if you get the proof that you are exempt and it’s dated to a day prior to your closing date. If this happens, the VA will refund you the money in the method you paid it. For example, if you paid the money in cash at the closing, the VA will send you a check. If you wrapped the cost into your loan, the lender will pay the amount directly to your principal to lower your mortgage amount.
Exemption from the VA funding fee isn’t required or automatic. You must apply for it and you must provide the lender with proof of why you are exempt. This includes all disability paperwork that shows your disability rating and proof of receipt of the disability income.
The good news is that the VA funding fee is a one-time fee. You don’t have to worry about adding to your monthly payments. The VA doesn’t’ require veterans to pay mortgage insurance. Once you pay the funding fee, you’ve met your obligation. This makes VA loans an affordable option for veterans.