A Detailed Look at the VA Funding Fee: What's it Cost and Who's Exempt
The VA funding fee is a government fee applied to many VA purchase and refinance loans. Here we take a deep dive into why this fee exists, how much it costs and who is exempt from paying.
The VA Funding Fee is a governmental fee applied to every VA purchase and refinance loan. This fee goes directly to the Department of Veterans Affairs to help cover losses and keep the loan guaranty program running for future generations of military homebuyers.
What is the VA Funding Fee for 2020?
The VA funding fee is 2.3% of the amount borrowed with a VA home loan. The funding fee increases to 3.6% for borrowers who have previously used the VA loan program, but can be reduced by putting at least 5% down at closing.
The fee changes depending on several factors, including the type of VA loan, whether the borrower has used the VA loan benefit before and whether there's a down payment. Borrowers with service-connected disabilities and select others might not have to pay it at all.
Historically, regular military members pay slightly lower funding fees than Reservists and National Guard members. However, in 2020, fees for all military branches are equal due to the passing of the Blue Water Navy Vietnam Veterans Act.
VA Funding Fee for Purchase Loans
As you'll see in the table below, borrowers purchasing with a VA loan for the first time receive a lower VA funding fee than subsequent users. Though not required, both first-time and subsequent purchasers can decrease the funding fee with a minimum 5% down payment.
The following table shows the current VA funding fee rates on purchase loans for veterans, active military and Reserves and National Guard members.
2020 VA Funding Fee Chart
| - | Down Payment | Funding Fee |
|---|---|---|
| First Use | None | 2.3% |
| - | 5% or more | 1.65% |
| - | 10% or more | 1.40% |
| After First Use | None | 3.60% |
| - | 5% or more | 1.65% |
| - | 10% or more | 1.40% |
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VA Funding Fee for Refinance Loans
The VA has two refinance products: The Interest Rate Reduction Refinance Loan (IRRRL) and the VA Cash-Out refinance. The funding fees for each type of VA refinance differ, in part, because of their objectives.
The IRRRL exists to get current VA homeowners into a lower mortgage rate or move from an adjustable-rate to a fixed-rate VA loan. The Cash-Out refinance allows qualified veterans to refinance and extract cash from equity, and it's open to eligible veterans with VA and non-VA loans.
What is the VA funding fee for the VA IRRRL?
Unless otherwise exempt, the VA funding fee for borrowers using the VA streamline refinance (IRRRL) is 0.5 percent regardless of service history or prior usage.
The funding fee for a Cash-Out refinance is similar to a VA purchase loan, except borrowers cannot lower the VA funding fee by making a down payment or using equity.
The following table shows the VA funding fee rates on VA Cash-Out refinance loans for veterans, active military and Reserves and National Guard members.
VA Funding Fee Chart for Cash-Out Refinance Loans
| First Use | After First Use |
|---|---|
| 2.30% | 3.60% |
Paying the VA Funding Fee
Mortgage lenders have no control over who must pay the VA funding fee or the specific amount. Your Certificate of Eligibility (COE) typically indicates if you're required to pay the VA funding fee.
Those required to pay the VA funding fee must do so at closing. Your lender is responsible for collecting the funding fee and sending it directly to the VA through their automated system.
VA buyers have a handful of options to pay the VA funding fee. These options include:
- Financing the VA funding fee over the life of the loan.
- Paying the fee out of pocket.
- Asking the seller to pay the fee on their behalf.
Typically those required to pay the VA funding fee choose to finance it into the entire loan amount.
For reference, on a typical $200,000 loan, a regular military veteran using a VA loan for the first time would borrow an additional $4,600 to cover the funding fee.
VA Funding Fee Exemptions
Not everyone is required to pay the VA funding fee. The VA exempts specific borrowers from paying the funding fee on both purchase and refinance loans.
Those exempt from paying the VA funding fee include:
- Veterans who receive compensation for service-connected disabilities
- Veterans who would receive disability compensation if they didn't receive retirement pay
- Veterans rated as eligible to receive compensation based on a pre-discharge exam or review
- Veterans who can but are not receiving compensation because they're on active duty
- Purple Heart recipients
- Surviving spouses who are eligible for a VA loan
When evaluating funding fee exemptions, lenders will typically look at the Certificate of Eligibility or a Verification of VA Benefits (sometimes referred to as the VA funding fee exemption form).
For veterans who receive retirement pay instead of VA compensation, lenders can use a copy of the original disability rating notification and financial documents that show the retirement income.
There are situations where the exemption status isn't clear cut. Only the VA can determine funding fee exemptions.
Lenders must collect the funding fee and send it to the VA in cases where the borrower's exemption status isn't confirmed before closing or when the borrower has a disability claim pending at the time of closing.
If the veteran is awarded disability compensation after the loan closes, it may be possible to obtain a refund of the VA Funding Fee.
Uncommon Funding Fee Scenarios
When two veterans with VA loan entitlement get a loan together, the funding fee is still in play. But it can wind up working a bit differently in these relatively uncommon cases. A primary consideration is who's contributing VA loan entitlement.
If two veterans contribute entitlement, but one of them is exempt from paying the funding fee, the funding fee on their loan is cut in half. If the same set of veterans seek a VA loan, but the exempt veteran is not contributing entitlement, their loan would carry the full funding fee.
Last, VA loan assumptions come with a 0.5 percent funding fee.
Talk with a Veterans United loan specialist if you have questions about VA loan closing costs, including the funding fee.
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