VA Funding Fee

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The funding fee is one of the first hurdles you will have to leap on your way to securing your VA loan. VA loans do not always require any sort of down payment, but the funding fee does need to be paid before a loan can go through the process.

The good news: You might not have to pay your funding fee at all, and if you do, it might be included with your loan rather than requiring an out-of-pocket payment up front. But this doesn’t always apply.

It can seem a little confusing at first, but it’s not so hard to get a general grasp on once you look at the facts.

What’s Is the VA Funding Fee For?

The whole purpose of the VA loan is to cut through some of the red tape and some of the costs and to make it a little easier for veterans and their spouses to take out a loan.

So what’s the funding fee for?

The funding fee is intended to help address the issue of people defaulting on their loans. The fees collected help to offset the VA funds against these defaults, and the up-front costs weed out many borrowers who would not be able to pay back the loan.

Not many borrowers actually default on VA loans in the first place, which is why the funding fee is generally a pretty modest percentage in comparison to most down payments and other up-front borrowing costs. Whether the low default rate proves that the VA funding fee is working, or proof that it’s unnecessary we’ll leave for you to decide. The bottom line is that if you want to take out a VA loan, you’re probably going to need to gather up some cash to make your funding fee.

Who Pays What?

There is a sort of sliding scale at work in determining who’s going to pay what when it comes to VA loan funding fees. Factors that weigh into the percentage paid include military service record, whether or not you’ve decided to take a loan that does require a down payment, whether or not you are currently collecting disability and so on.

VA Funding Fee

For Purchase and Construction Loans

  • Regular Military
    • No down payment
      • First time use: 2.15%
      • Second time use: 3.3%
    • 5% or more down payment
      • 1.5%
    • 10% or more down payment
      • 1.25%
  • Reserves or National Guard
    • No down payment
      • First time use: 2.4%
      • Second time use: 3.3%
    • 5% or more down payment
      • 1.75%
    • 10% or more down payment
      • 1.5%

 For Cash Out Refinancing Loans

  • Regular Military
    • Second time use: 3.3%
    • First time use: 2.15%
  • Reserves or National Guard
    • First time use: 2.4%
    • Second time use: 3.3%

Other Types of Loans Available

In addition to the more typical purchase, construction and refinancing loans, there are also VA loans for the following:

  • IRRRL or Interest Rate Reduction Refinancing Loans – .5%
  • Manufactured Home Loans – 1%
  • Loan Assumptions .5%

Who’s Exempt From The VA Funding Fee

Not everybody has to pay a funding fee for their VA loan. So who’s exempt?

If you are currently receiving a minimum of ten percent VA disability compensation, you will not have to pay a funding fee. You can also apply for a refund on your funding fee if you have been awarded disability compensation after paying your fee. You can apply for a refund only so long as the beginning date of your disability benefits is prior to the home mortgage’s closing date.

The funding fee is also waived for surviving spouses.

What if You Can’t Get The Money Ahead of Time?

Many borrowers choose to pay their funding fee in cash, however, you can actually have it added to your total loan amount. In this event, your funding fee will be covered for the time being by the lender.

This goes for a wide range of closing costs, including hazard insurance, transfer taxes, recording fees and so on.

The question is whether or not this is preferable to simply paying the funding fee in cash right up front. It depends on a number of factors, but ultimately it’s your choice. Consider whether you want to be paying interest on your funding fee. And if you cannot afford 2.15%, 2.4% up front, then is this the right time to be taking out a VA loan anyway, or should you wait until you have a little more money freed up?

Additionally, if you can afford to pay your own way up front, then your list of possible lenders gets much longer, and it’s up to you who you borrow from. Not every lender will offer to include your fee in the loan itself, but they may be your best option on every other front.

Packing your funding fee costs in with the loan will only be an option if the sales price plus the financed VA funding fee add up to less than the maximum loan amount in your particular county. If you exceed that number, then out-of-pocket is your only option for paying your funding fee.

Generally speaking, it’s a good idea to make sure that you have your funding fee on hand before you seek a VA loan in the first place, but every situation is different, and you need to find the plan that works for you, whether that means putting your fee in with the loan itself or taking a few dollars out of a savings account to cover the funding fee on your own.

VA Funding Fee Costs

What Other Costs Are There To Consider?

Taking out a loan frequently comes with fees that you hadn’t foreseen. Borrowing a large sum of money is rarely as easy as simply showing someone your paperwork, putting something up for collateral or putting in a down payment, and walking away with the cash that you need.

Additional costs involved with taking out a VA loan can include:

  • Hazard Insurance 
  • Transfer Taxes
  • Recording Fees
  • Title Insurance
  • Title Search
  • VA Appraisal
  • Credit Report
  • Loan Processing Fee
  • Survey Charges

Some or all of these can be paid for by your lender depending on who you’re borrowing from and the terms of your deal, some of these costs may be waived, and there may be additional financial considerations to cover on your way to taking out your loan. It will generally boil down to essentially the same factors that weigh into taking out any loan, with or without VA involvement:

  1. Your financial history, credit score, income and so on
  2. Local and federal laws and regulations pertaining to property ownership, insurance, and lending
  3. Who you’re borrowing from, and
  4. What you’re using the loan to finance

A veteran can buy a home in Virginia and one in California at the same price, but because the laws and regulations are different in each state, that veteran is looking at very different terms and costs from one loan to the other. There are also discounts and waived fees that can be taken into consideration.

What Are Your Options?

You won’t really know what you’re going to pay for your VA loan until you sit down and talk it over with the person who is helping you to get a loan. The best way to bring your total down is to:

  1. Stop worrying about it just yet
  2. Talk to a lender, broker or agent
  3. Discuss your options
  4. Find out what kind of waivers and discounts you qualify for
  5. Adjust your plans accordingly

Oftentimes a difference of just a few hundred dollars in the price of a home can result in thousands of dollars saved over the long run in paying off your loan. Spending a little more on insurance up front might bring your rates down substantially.

In short: Just practice the same due diligence with your VA loan as you would with any other type of loan. The VA loan program is intended to make the whole process a little easier for veterans and their surviving spouses, but we still have to contend with all of the ins and outs of the lending industry, local laws and regulations, insurance costs, fees, deductions, taxes, insurance and so on. Your head may be spinning reading all that, but take our advice and don’t worry about it too much.

Why Shouldn’t You Worry About It Too Much?

If this all sounds really, really complicated, the good news is that your agency, broker or lender is probably looking to do most of the legwork for you. They don’t get their commission until they connect a lender with a borrower, and they spend all day going through the paperwork and trying to figure out how to give you an offer you can’t refuse.

Feel free to explore your options, you don’t have to take the first reasonable deal that you’ve been offered, but know that you don’t have to go to school to learn accounting just to make sense of your loan offers. You can generally trust a seasoned professional to manage all of that on your behalf. It’s not much different from buying auto insurance, for instance: You don’t know off the top of your head the state minimum requirement is for bodily liability and so on, but you don’t have to know, your insurance agent does, and they’ve done what they can to find you the best deal and cut through the red tape for you. All you need to do is take a look at the paperwork, compare a few quotes, and sign the deal you like the best.

VA loans can be a complicated affair, but for the most part, it’s not really your problem to fret about. If you have your heart set on a home that exceeds the county limit when combined with the funding fee, then you may need to figure out a way to get the cash together before the loan can go through, or you might want to shop around for a slightly cheaper building. But most of the really challenging stuff involved with taking out a VA loan isn’t your job to manage unless you want to go directly to a lender who’s not even all that experienced with VA lending and try to teach them how it works. And there’s easier ways of getting your home financed than all that.

Where you’re going to want to start is with a lender, agent or broker who is experienced with VA loans, who knows how to get you the best deal, and who can get all your paperwork and closing costs through the process, from VA appraisal to funding fees to insurance and taxes, and simply present you with a few forms to sign to get the ball rolling.

The VA loan program is the first big step in the right direction to make life easier for the first-time veteran homebuyer, the right lender is the other big step. Between the two of them, you’ll be standing on solid ground.

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