What are VA funding fees and how much do they cost?
One of the many benefits of a VA mortgage is that you can secure this type of home loan without any down payment. That’s music to the ears of many active and former service members who would like to finance a new home purchase, but may not have tens of thousands of dollars on hand to make a large initial lump-sum payment.
That doesn’t mean VA loans are completely free of upfront expenses, however. Whether you’re buying a new house or refinancing an existing mortgage into a VA loan, you’ll still need to pay closing costs, just like any other home loan. VA loans are a bit distinct in this regard, though, since they require borrowers to pay a VA funding fee to close on a new mortgage.
How much will a VA funding fee run you in 2022? And are there ways to avoid paying this additional expense on your VA mortgage? Read on to learn everything you need to know about VA funding fees.
What is a VA funding fee?
VA loans offer affordable alternatives to conventional mortgages for eligible service members, as well as certain family members. Removing the down payment from the equation is a huge incentive for many prospective homebuyers — not to mention the competitive interest rates and absence of private mortgage insurance.
But the Department of Veterans Affairs needs to offset those cost-savings in other ways — and that’s where the VA funding fee comes into play.
Va funding fee definition
The VA funding fee is an upfront expense paid when applying for a VA mortgage. Rather than go to your lender, this cost goes directly to the Department of Veterans Affairs to help fund the program and keep it running.
Keep in mind that 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, VA funding fees are assessed to applicable VA home loans.
Also, if you’re not sure you’ll be able to cover the cost of your VA loan fees all at once, don’t worry — you have options. You can pay your funding fee upfront as part of your closing costs, or you can bundle the expense into your loan amount and finance it over the term of the loan.
How is your VA funding fee calculated?
The Department of Veterans Affairs calculates your funding fee as a percentage of your loan principal — AKA, the total loan amount. But loan size alone doesn’t determine VA funding fee rates. The VA also weighs the following factors:
- The size of your down payment (if you choose to make one)
- The nature of your VA mortgage (new purchase, refinance, IRRRL, etc.)
- The number of times you’ve used your VA entitlement
In many cases, VA funding fees can be significantly lower than the down payment you might otherwise have put down on the same property using a conventional mortgage. While they add an extra closing cost to account for, remember that VA loan fees allow for the continuation of veteran assistance programs that have helped thousands of families buy a home.
What is the current funding fee?
Given all the criteria listed above, there’s no set funding fee that covers every VA mortgage and every loan scenario. According to the Department of Veterans Affairs, the amount you owe on your funding fee may be affected by the size of your down payment, your VA entitlement and the type of home loan you’re using. Take a look at the following VA funding fee charts to see how the percentages break down depending on your circumstances:
VA funding fee chart (Purchase)
Looking at the VA funding fee chart below, first-time homebuyers who don’t make a down payment have a real incentive to use this type of financing. You’ll notice that the funding fee is lower if you’ve never used your entitlement before. The good news for anyone who already has an existing VA loan, though, is that the percentages stay the same no matter how many times you use your entitlement after the first instance.
First time using entitlement
VA funding fee
Less than 5%
5% to 10%
More than 10%
Second time using entitlement and beyond
VA funding fee
Less than 5%
5% to 10%
More than 10%
VA funding fee refinance chart
Unlike home purchases, VA funding fees on mortgage refinances don’t change depending on how much money you put forward on a down payment. The only factor to look at with a VA refi is whether you’ve used your entitlement in the past. The VA doesn’t distinguish between traditional mortgage refinances and cash-out refis — at least when it comes to funding fees. You’ll pay the same amount on a VA cash-out refinance funding fee as you would on a typical refi.
First use of entitlement
Every time after
VA funding fee for streamline refinance
Interest Rate Reduction Refinance Loans (IRRRL) — also known as streamline refinances — are a bit of an exception. The VA does offer different funding fees for IRRRLs, and they’re usually lower than other refi options. Another distinction to remember is that the VA sets a flat funding fee rate for IRRRL loans, rather than try to account for other variables in its calculations. As of 2022, the current VA funding fee on a streamline refinance is 0.5%
Are there VA funding fee exemptions?
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 VA funding fee exemption have the cost completely removed as an expense. On a $250,000 mortgage, for instance, borrowers in this situation could save up to $7,500 on their VA loan 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:
When might you be exempt from paying the va funding fee?
- 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 (COE). A COE demonstrates your military service record and, as such, are used by lenders to verify your VA home loan eligibility. These documents can be readily 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.
Are VA funding fees tax deductible?
In some cases, yes, you may be able to deduct your VA funding fee from your taxes.* If you are eligible for this kind of tax deduction, you’ll need to apply it the same year you pay your VA closing costs. The exception would be if you choose to spread out your funding fee across the length of your home loan. In either case, be sure to consult a certified tax advisor to see if you qualify for a VA funding fee tax deduction.
A VA funding fee is the upfront expense paid to secure a VA mortgage. The Department of Veterans Affairs calculates funding fees based on your total loan amount, but it also takes other factors into account, like your VA entitlement, type of VA loan and the size of your down payment.
You’ll need to pay a VA funding fee no matter what type of VA loan you use, but you don’t necessarily have to cover the entire cost at closing. You’ll have the option to finance the expense over time and spread it out over your mortgage payments. Because of that flexibility, you shouldn’t view funding fees as an obstacle to homeownership. Work with a VA loan specialist to find a financing plan that fits your budget and works for you.
*Guaranteed Rate does not provide tax advice. In no way is any tax content contained herein to be construed as financial, investment, or legal advice or instruction.
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