Understand how the VA funding fee impacts your loan
Funding fees and other VA-loan charges
- The VA funding fee replaces private mortgage insurance, resulting in lower interest rates and closing costs.
- Funding fees are based on a military member’s employment status and down payment amount.
- VA allows lenders to charge a 1 percent origination fee, but borrowers may not be charged attorney or broker fees.
- VA loan borrowers typically pay lower interest rates than they would with a conventional loan.
For current and former members of the military, securing a Veterans Affairs (VA) loan helps with homeownership, as borrowers often have fewer upfront costs and lower monthly payments.
There is, however, a key caveat when obtaining a VA loan: With the exception of eligible disabled veterans or spouses of veterans who died in service, borrowers must pay a funding fee. It’s a percentage-based fee that takes into account the loan amount and the borrower’s military status.
How to calculate the VA funding fee
Full-time, active-duty military personnel receive lower funding-fee rates than reservists or National Guard members. In April 2017, for example, active-duty personnel taking out a purchase loan for the first time paid a fee of 1.25 percent with a down payment of 10 percent or more; 1.5 percent with a down payment of 5 percent or more; and 2.15 percent with a down payment less than 5 percent. Reservists and National Guard personnel pay 0.25 percent more for each of the three down payment categories.
So, a full-time U.S. Army employee who is taking out a $200,000 loan with no down payment would pay a fee of 2.15 percent, or $4,300. An Air National Guard employee borrowing $300,000 with a 10 percent down payment would pay a fee of 1.5 percent, or $4,500.
Borrowers who previously have used a VA loan receive the same funding-fee percentage as before, as long as they make a down payment of at least 5 percent. With smaller down payments, the fee rises slightly. VA loans are also available to homeowners looking to execute a cash-out refinance. There are no discounts for refinancing, regardless of how much equity a home has.
There are other loan types that have funding-fee requirements. Interest Rate Reduction Refinancing Loans (IRRRLs), or VA streamline loans, include small fees.
The VA funding fee is, essentially, like an insurance payment. Fees are used to reimburse lenders in case of default. However, unlike other programs, VA loans do not have private mortgage insurance, typically reducing a borrower’s monthly payment. And borrowers can choose whether to pay the fee at closing or roll it into their monthly payment.
Identify other loan fees
The VA notes some separate costs aside from the funding fee that borrowers should be aware of. Lenders set interest rates, discount points (prepaid interest amounts) and closing costs, all of which can vary. Lenders may factor in a 1 percent origination fee to cover the costs of processing a loan. However, the VA does not allow lenders to pass on attorney or broker fees — or inspection fees, if the home was constructed under U.S. Department of Housing and Urban Development guidelines — to borrowers.
It’s also important to know that many closing costs — appraisal and title fees, taxes and credit reports — can be negotiated between a buyer and seller, with the seller paying all or a portion of the costs.
Although it’s not a universal truth, VA loans typically carry lower interest rates than traditional loans, Veterans United Home Loans says. That’s because the VA’s guarantee allows lenders to assume less risk. A rate decrease of 0.5 to 1 percent is common. So, for example, a borrower purchasing a $250,000 home with a 10 percent down payment would wind up paying $48,240 less in interest, based on a savings of 1 percent.