Every time you refinance your VA loan, you pay a funding fee. This fee goes directly to the VA and is how they continue to remain a self-funded program. Without the funding fee, the VA would have to rely on the taxpayers’ money to offer the program.
But do you qualify for an exemption? Certain borrowers do, find out if you are one of them.
How Much is the Funding Fee?
First, it helps to know how much you will pay for a VA funding fee. When you bought the home, you paid either 2.15% of the purchase price or 2.4% of the purchase price depending on your military status. Regular military members pay 2.15% and members of the National Guard or Reserves pay 2.4% of the loan amount.
When you refinance with the VA Interest Rate Reduction Refinance Loan, you are able to save on that funding fee, though. The VA lowers the fee to just 0.5% of the loan amount for all veterans.
What Does the Funding Fee Do?
The funding fee is what the VA uses to offer the guaranty to lenders. For each eligible veteran, the VA guarantees the lender that they will pay them back a portion of the loan if the borrower defaults. The VA guarantees 25% of the loan amount, which is usually much more than any borrower would put down on a home, so it’s a win-win for lenders and borrowers.
You only pay the VA funding fee one time and that’s at the closing. There isn’t any monthly mortgage insurance or any other miscellaneous fees that the VA requires. If you decide to, you can roll the funding fee into your loan, but then you’ll pay interest on the fee for the next 30 years.
Who Doesn’t Pay the VA IRRRL Funding Fee?
Even though it’s only 0.5% of your loan amount, the funding fee is still a decent cost. Let’s say you borrow $200,000. You would pay $1,000 for the funding fee. What if you could get around that fee? Some borrowers are able to and it’s those veterans that were disabled while in the military or as a result of the military.
You will know if you are exempt from the fee as it will show on your Certificate of Entitlement. The VA has to render you disabled and pay you disability pay as a result. Almost 1/3 of veterans have this status, which means they are exempt from the funding fee.
You will be exempt from the fee if you meet any of the following:
- You currently receive disability pay from the VA
- You are eligible for disability pay but collect retirement pay instead
- You were rendered disabled, but have yet to receive your payments
One more group that is exempt from the VA funding fee is any widowed survivors of members of the military. If your spouse died while on active duty or as a result of his service, you are exempt from the funding fee as well.
Paying the Funding Fee Before Finding out Your Disability Rating
In some cases, veterans know they are disabled, but have yet to receive official word from the VA on their rating. If you can’t put your closing off, you’ll have to pay the funding fee. When the VA provides your disability rating, you can get a refund of the amount you paid.
The lender must make sure of two things:
- You are officially labeled disabled by the VA
- You were labeled disabled prior to your closing date
The VA may send out your documents after you close, but they make the disability rating date retroactive to when it actually happened. This means that if your disability date is before the closing date, the VA will give you a refund of your VA funding fee.
The VA will refund your funding fee the way that you paid it. If you paid cash at the closing, you’ll receive a check in the mail from the VA. If you wrapped the fee into your loan, the VA will credit your principal balance the amount that you paid for the funding fee.
If you are exempt from the VA funding fee, you stand to save some money on your VA refinance. If you aren’t exempt, you will have to pay the fee, which is reduced from when you bought a home. The VA IRRRL can be a great way to save money overall, helping you to get ahead financially.