Section 2.9

The VA Funding Fee

The VA funding fee is one of the more unique aspects of the VA home loan program. As one of the allowed closing costs for a VA loan, the funding fee plays an important role in the VA home loan program. In addition to explaining what this role is, we'll also explain what, exactly, the funding is, why it's important, and how much it costs.

What Is the VA Funding Fee?

As we've already mentioned, the VA funding fee is an allowed closing cost that gets collected on nearly every single VA loan. But it's also so much more than that.

For starters, unlike other closing costs, the funding fee doesn't go to your lender. Instead, it's a one-time payment that goes directly to the VA itself.

This setup exists because the funding fee is actually what fuels the engine of the VA loan program, keeping it running for future generations of veterans.

Why Is the Funding Fee Important?

So, the funding fee keeps the VA loan program functioning. But how, exactly?

To put it simply, the money collected from the fee infuses the VA loan program with the means necessary to back up both current and future loans issued to servicemembers.

In prior articles from this series, we've discussed how the VA's 25% guarantee is what makes VA loans so great. In fact, nearly all of the amazing benefits and advantages of VA loans are only possible because of it.

But in order to make good on that 25% promise, the VA needs to have a pool of reserves they can use whenever a VA loan borrower goes into default or foreclosure.

And that's exactly what the funding fee does: it creates a stockpile that funds the VA loan program so vets can continue to enjoy no down payments, no private mortgage insurance, lower interest rates—and more—on their VA home loans.

The funding fee has essentially made the VA loan program completely self-sufficient and incredibly stable. It's able to function without any cost to taxpayers, which sometimes seems almost unheard of in today's world.

So, How Much Is the Funding Fee?

Since it is, after all, a funding fee and a type of closing cost, that does, unfortunately, mean it will cost you a little bit of money.

However, there's still good news! Firstly, it's important to remember that the military is one big family, and paying the funding fee helps out your brothers and sisters.

Secondly, the funding fee itself isn't usually that expensive, and often your total closing costs will still be less than what you'd pay for closing costs on other loan programs, and you may even be able to roll it into the loan amount so you can pay it off over time.

So now that we've got that little disclaimer out of the way, let's actually dive into the numbers and factors that influence the actual funding fee amounts.

How the Funding Fee Is Calculated

There are a few factors that contribute to how much your specific funding fee will amount to. These include:

The type of VA loan you're getting
How much of a down payment (if any) you choose to make
Whether you've used your VA loan benefits before

Starting with the type of VA loan, let's look at how these different factors might translate into what funding fee percentage you could end up paying.

Funding Fee Percentages for VA purchase loans

The funding fee for VA purchase loans tends to have the largest range of possibilities, simply because it's affected by potential down payment amounts, as well as how many times you've used your VA loan benefits before.

Since most of you are just starting to learn about VA loans, you probably haven't ever gotten a VA home loan before, so let's start there and look at what different down payment amounts will get you in terms of your VA funding fee.

Funding Fees for First Use of VA Loan Benefits on a Purchase Loan

Down Payment	Funding Fee Amount
5%	2.3%
5% or more	1.65%
10% or more	1.4%

As you can see, a larger down payment means a lower your funding fee. However, because the funding fee is only divided into three tiers, you won't receive any extra benefit, for example, if you pay 20% vs. 10% down. Your funding fee in both situations will still be 1.4%.

We also wanted to make sure we reminded you that you don't have to pay any down payment at all. 0% down would fall under the first tier in the above table, which means your funding fee would be 2.3%.

Now, just for information's sake, let's quickly discuss what the funding fee ends up being on a purchase loan if you have already used your VA home loan benefits.

To put it simply, after the first use of your VA loan benefits, the funding fee jumps to 3.6% if you make a down payment that's less than 5% of the loan. For down payments of 5% or more and 10% or more, the fee stays the same as what's listed in the table above.

Funding Fee Percentages for VA Cash-Out Refinances

When you get a cash-out refinance, you don't have to worry about down payments, which means the only factor influencing your funding fee amount is whether or not you've used your VA loan benefits before.

First Use	After First Use
2.3%	3.6%

If you already have a VA loan, that means you've used your VA home loan benefits before, and your funding fee would be 3.6%.

However, if you want to use a cash-out refinance to move from another loan type into a VA loan, then you may not have used your VA loan benefits before, which is when you'd qualify for the 2.3% funding fee amount.

Funding Fee Percentages for VA IRRRLs & Loan Assumptions†

While these are two very different types of VA loans, we lumped them together because, when it comes to their funding fee, they do share some similarities. Again, because they both involve an already existing loan, you don't have to worry about down payments on either one.

Their other similarity is that, unlike both cash-out refis and VA purchase loans, they also aren't affected by how many times you've used your VA loan benefits. Instead, you'll always pay the same (really low!) funding fee percentage every time you get a VA IRRRL or assume someone else's VA home loan.

Funding Fees for IRRRLs & Loan Assumptions

IRRRLs	Loan Assumptions
.5%	.5%

†A loan assumption is a technical term that refers to when a new borrower takes over legal and financial responsibility for another borrower's existing VA home loan.

Is Anyone Exempt from Paying the VA Funding Fee?

While most veterans and servicemembers are required to pay the funding fee if they want a VA loan, the VA does waive it in some situations.

The primary waivers go to any veteran or servicemember with a VA disability rating of 10% or more. Basically, if you receive disability pay from the VA, you won't have to pay the funding fee.

Others who are also exempt from the funding fee include Purple Heart veterans, some surviving spouses, and more. You can view a full list of all those who are exempt by visiting the VA's website.