How the VA Funding Fee Makes No Money Down Possible

One of the most coveted benefits of the VA home loan program is the ability to purchase with no money down, a guarantee made possible through the VA Funding Fee. The VA Funding Fee is a set fee applied to new purchase loans and refinance loans, paid directly to the Department of Veterans Affairs.

The primary purpose of the fee is to compensate for losses on loans that have gone into default, but there’s some other purposes too.

What other important things do you need to know about this important facet of the VA loan program?

Five Factors

The VA funding fee isn’t pulled out of thin air. There’s some solid arithmetic behind it.

The fee is calculated using five factors: VA loan history, down payment, loan type, loan amount, and type of service. Generally, the funding fee cost is less for first-time homebuyers and for those who have the ability to make a down payment on the home, even though no money down is a big advantage of the loan.

The loan type is also factor, based on whether the loan is to buy or refinance. The cost is higher to refinance, particularly for the cash-out refinance, which is for those who want cash back or who don’t have an existing VA home loan. The final factor, type of service, can make a difference for hundreds of dollars in savings or costs alone.

The tables below show a more in-depth look at how the fee varies based on these factors.

For Purchases
Type of Veteran      Downpayment      1st Time Use      Subsequent Use
Regular Military        None        2.15%        3.30%
       5% to 10%        1.50%        1.50%
       10% or More        1.25%        1.25%
Reserves / National Guard        None        2.40%        3.30%
       5% to 10%        1.75%        1.75%
       10% or More        1.50%        1.50%
For Cash Out Refinances
Type of Veteran      1st Time Use      Subsequent Use
Regular Military        2.15%        3.30%
Reserves / National Guard        2.40%        3.30%

While the fee is unavoidable for most VA borrowers, it does not need to be paid in cash at closing. Many roll the fee into the loan, which adds a few dollars to the monthly mortgage payment but still allows for a purchase with absolutely no money down.

Additionally, there are exemptions for borrowers with service-connected disabilities, such as those currently receiving disability payments from the VA or considered to be at least 10 percent disabled. Spouses of those who died in service or from a service-connected disability may also be exempt.

With so many different components affecting the fee, determining a one-size-fits-all cost is impossible. Prospective buyers can use this Funding Fee Calculator to determine the amount specific to their situation, or contact a VA Mortgage Specialist at 855-870-8845.

Photo courtesy Bill Wilson