What is a VA funding fee and how much do they cost?
You might consider applying for a VA mortgage because of the lower upfront costs and no down payment requirements. However, in order to secure this type of financing, you’ll still be required to make an upfront payment known as a VA funding fee.
The VA funding fee is an upfront expense paid when applying for a VA mortgage. Rather than your lender, this cost goes directly to the Department of Veterans Affairs to keep the program running.
VA mortgages are backed by the U.S. government, meaning the program’s expenses are carried by taxpayers. As a means of supplemental funding and to ease the tax burden on U.S. citizens, the VA funding fee was established. Calculated as a percentage of the overall loan amount, VA funding fees allow for the continuation of veteran assistance programs that have helped thousands of families buy a home.
Before we get into how much this expense will cost and how it can be avoided, let’s understand when you will be required to pay a VA funding fee.
Applying for a VA mortgage
Borrowers who qualify for a VA mortgage will almost always be required to pay a funding fee. These mortgages come with the advantages of zero down payment requirements, comparatively lower interest rates and no need for private mortgage insurance, making them an extremely popular lending option for military members and their families.
The VA also does not set a credit score minimum for mortgage eligibility, so any financial issues in your past won’t automatically disqualify you from the program. Your lender, however, will set their own credit score minimums and approve your application accordingly.
In order to qualify for a VA mortgage, you’ll need to be an active service member, retired veteran or surviving spouse. In addition, the VA also sets a number of requirements based on service history:
- Active duty members need to have served 90 consecutive days.
- Veterans must meet the length-of-service standards, according to VA.gov.
- Service members must complete 90 days of active duty, or six years in the National Guard or Selected Reserve.
Some of these service requirements can be waived for military members who were discharged for a service-related injury. These exemptions can vary from case to case, so be sure to check with your local VA to verify your discharge status and whether you qualify for a loan.
Surviving spouses of service members who were injured, captured or killed in the line of duty may also qualify for a VA home loan.
How much is a VA funding fee?
VA funding fees are calculated as a percentage of your mortgage’s overall amount, so the amount you’ll pay will depend on the size of your loan.
According to the VA, the VA funding fee in 2021 is 2.3% of the home’s principal amount. If you’ve utilized the VA mortgage program previously, you’ll have to pay a slightly higher 3.6%. This increase can also be mitigated by contributing 5% or more as a down payment.
Let’s say it’s your first time taking out a VA mortgage that amounts to $200,000. You’d be expected to pay $4,600 to satisfy the VA funding fee. This cost can be settled as part of your closing costs in a one-time payment, or you can have the expense added to your mortgage and finance it over the term of the loan.
Most borrowers will opt to finance their funding fee over time, as it is the only closing cost that can be added to your monthly payment. Financing the VA funding fee also limits the amount of cash-on-hand you’ll need to close the loan. While you’ll still need to pay other expenses upon closing, the heftiest of them can be financed.
Can you avoid a VA funding fee?
VA funding fees won’t be a requirement for every loan applicant as the VA does allow for exemptions in some cases. Those who qualify for the exemption have the cost completely removed as an expense. On a $250,000 mortgage, borrowers in this situation could save up to $7,500 on their closing costs.
However, in order to avoid paying a VA funding fee, your service history will have to match up with one of these requirements:
- You already receive VA disability income.
- You're eligible for disability income but receive active-duty or retirement pay.
- You have a memorandum that states you’re eligible for disability pay, dated before your loan closing.
- You’re an active duty Purple Heart recipient.
- You’re the surviving spouse of a veteran who died as a result of their military service.
If you’re uncertain about whether you qualify for VA disability benefits, you can check with the Department of Veterans Affairs to determine your status. Your lender will also verify that you receive disability payments and will confirm with the VA.
Your funding fee requirement status will also be displayed on your certificate of eligibility. A COE demonstrates your military service record and can be obtained by any veteran, active service member or surviving spouse. If your COE indicates an exemption, your lender will remove the funding fee from your mortgage costs.
Can you have your VA funding fee refunded?
A VA funding fee exemption is given to applicants with an approved disability claim, but what if your claim is approved after your VA mortgage closes?
If your pending disability claim was approved after paying this upfront expense, you might be able to have the fee refunded. To qualify for this refund, your disability compensation would need to be retroactively approved prior to the date your loan was closed.
Your lender and VA regional loan center will have more information on how to obtain a VA funding fee refund and if your specific situation qualifies.
A VA funding fee is the upfront expense paid to secure a VA mortgage. This expense helps fund the VA mortgage program and is one of the heftier expenses when closing a VA loan.
The funding fee is typically settled upon closing, but you will have the option to finance the expense off over time. The VA funding fee isn’t the only hurdle to jump through when securing a VA mortgage and there are plenty of VA loan requirements you should be aware of before you submit an application.