With a VA-backed loan, you don’t have to pay for expensive private mortgage insurance, or PMI, even if you put less than 20% down on the home. And the eligibility and documentation requirements are often less stringent than those of a traditional mortgage.
You are also likely to get a more competitive rate than a non-government-backed loan.
But there’s a fee you’ll need to pay attention to VA funding fees. Most people who get a VA-backed home loan will have to repay it, and this can make your new or refinance mortgage more expensive than expected. Here’s what you should know about VA funding fees.
VA borrowers can pay less on funding fees by putting more money into their homes. Our chart below specifies how much you will pay, depending on how much you put down and whether or not you have used the program before.
The VA funding fee is a one-time fee paid to the Department of Veterans Affairs that supports the VA loan program.
Veterans who invest less than 5% on the purchase of their homes will pay 2.3% of the total loan amount when buying a home for the first time and 3.6% on subsequent loans.
This government fee varies from time to time. The present fee structure will be applicable till January 1, 2023.
What is VA Funding Fee
VA loans have competitive interest rates and more generous credit standards than traditional mortgage loans, and they do not require mortgage insurance. Instead, they require most borrowers to pay VA funding fees.
A fee is a one-time fee that can be paid in advance or rolled over into a mortgage, whether for a VA home purchase or a VA refinance.
The VA funding fee is a one-time payment to obtain a new or refinanced mortgage backed by the VA.
“Since it’s a government-backed loan, it’s carrying a risk of non-repayment,” says Robo-consultant and head of tax at online bank Betterment.
Funding fees provide some level of protection for subsidizing a loan that does not require mortgage insurance and may not be as rigorous as the application and documentation process.
Depending on what type of loan you’re approved for, the fee may be paid in advance, with cash from your home equity (if you do a cash-out refinance). , or are included in your monthly payment.
VA loans are backed by the Department of Veterans Affairs, which repays a portion of the loan to the lender if the lender defaults. The funding fee helps defray the cost of that VA guarantee.
Is Anyone Eligible for a VA Funding Fee Refund?
If you paid the funding fee, but you believe you were eligible for a waiver at the time you paid it, you may be eligible for a refund.
An example of this would be if you had a disability claim pending during the home-buying process that was approved after closing.
If the effective date of your compensation is earlier than the closing date on your home, you may be able to get a refund on your funding fee.
If you believe you are entitled to a refund, contact your lender or call your VA Regional Loan Center at (877) 827-3702 in the United States of America.
Can You Add VA Funding Fees to Your Loan Amount?
Yes, in most cases you can add the cost of your funding fee to your loan amount. This means that you are not required to pay the cash-out-of-money fee at closing.
However, adding fees to your loan amount is likely to increase your monthly payment and the total amount you will pay in interest over the term of the loan.
Why Are VA Loan Grant Fees Evaluated?
VA loans are guaranteed by the Department of Veterans Affairs. The funding fee helps with this cost and others related to the VA loan program and ensures that the program remains sustainable.
This means that if a borrower defaults on a loan, the lender is partially protected from loss because the government insures the loan.
Are VA Funding Fees Tax Deductible?
Your VA funding fee may be tax-deductible. Current IRS rules may allow you to deduct your costing charge from taxes filed for the year in which you paid the fee. Consult your tax professional for more information.
VA Funding Fee in 2023
Here is the complete information of VA Funding Fee 2023 with chart information.
How Much Are VA Funding Fees?
The amount of the funding fee is based on how little you’re making and if you’ve ever taken out a VA-backed loan in the past. (If you have, a new loan is called a “later use.”)
VA funding fees will vary depending on the type of loan you choose. Some loans charge a tiered funding fee that varies depending on your down payment or whether this is your first time refinancing through the program.
Fees for the first VA purchase loan are 2.3% with zero down payment, 1.65% with a down payment of 5% to 9.9%, and 1.4% with a down payment of 10% or more.
The funding fee for a VA cash-out refinance loan is the same as for a purchase loan. The fee for the interest rate reduction refinance loan (a VA IRRRL loan) is 0.5% for first-time and subsequent use.
VA-Backed Purchase and Construction Loans
The funding fee will be lower if you are getting a VA-backed purchase (mortgage) or construction loan for the first time and will be lower if you make a larger down payment.
For example, if you’re getting a VA-backed mortgage for the first time and plan to make a 7% down payment, you’ll need to pay a fee of 1.65% of the loan amount.
VA-Backed, Cash-Out Refinance Funding Fee
A VA-backed, cash-out refinance is when you replace an existing mortgage (traditional or VA-backed) and take out a portion of the home equity as cash.
In this case, the VA funding fee for the first use (meaning you’re refinancing the home for the first time) is 2.3% of the loan amount, then 3.6% after the first use.
The fee amount will not change based on your down payment.
Interest Rate Reduction Refinance Loan (IRRRL)
With IRRRL, which is a VA-supported refinance option, the VA funding fee is 0.5%. It does not vary based on the down payment or the number of times you refinance the home.
VA Funding Fee Chart 2023
| Down Payment | First-Time VA Loan Use | Subsequent VA Loan Use |
|---|---|---|
| No Down Payment | 2.3% | 3.6% |
| 5% or more | 1.65% | 1.65% |
| 10% or more | 1.4% | 1.4% |
| Use at | If Your Down Payment is | VA Funding Fee |
|---|---|---|
| First use | Less than 5% | 2.3% |
| 5% or more | 1.65% | |
| 10% or more | 1.4% | |
| After first use | Less than 5% | 3.6% |
| 5% or more | 1.65% | |
| 10% or more | 1.4% |
VA Funding Fee Home Loan 2023
The VA funding fee rates for these loans do not change based on your down payment amount or whether you have used the VA home loan program in the past.
| Loan type | VA funding fee |
|---|---|
| Interest Rate Reduction Refinancing Loans (IRRRLs) | 0.5% |
| Manufactured home loans (not permanently affixed) | 1% |
| Loan assumptions | 0.5% |
| Vendee loan, for purchasing VA-acquired property | 2.25% |
How do You Calculate VA Funding Fee?
How much you pay depends on the type of loan you get and your total loan amount. Your funding fee is based on a percentage of your total loan amount.
The amount also depends on whether you are using a VA-supported or VA-direct home loan for the first time or have already taken out a VA loan.
The amount you pay also depends on your down payment amount.
For example, let’s say you plan to buy a house for $200,000 at 4% with a 0% drop. Your monthly payment will be approximately $955 for principal and interest only – not including taxes or insurance. If you pay the fee out of pocket, your interest rate will total $4,600 (2.3%).
- If there is no down payment, the funding fee is $3,450 ($150,000 x .023)
- If there is a down payment between 5 percent – 9.99 percent, the funding fee is $2,475. Is
- If the down payment is more than 10 percent, the funding fee is $2,100. Is
- The ‘discount’ ends on a 10 percent down payment, so whether you put in 10%, 20%, or more, the funding fee is 1.4 percent.
Rolling over $4,600 in your loan amount adds over $6,000 to the total cost over the term of the loan and will increase your monthly payment.
VA Funding Fee Waiver
Most people will have to pay a VA funding fee in the United States of America, but there are only some major exemptions if you meet one of the following criteria:
You get VA compensation for a service-connected disability.
You are eligible for VA compensation for a service-connected disability, but you receive retirement or active-duty pay instead.
Entitled to the service-connected disability or receiving compensation.
The surviving spouse of a veteran who died in the course of service or from a service-connected disability.
An active-duty service member who has received a Purple Heart.
You are the surviving spouse of a veteran who died while in service, died of a service-connected disability, or was completely disabled, and you receive Dependency and Indemnity Compensation (DIC).
You are a service member with a proposed or memorandum rating prior to the loan expiration date stating that you are eligible to receive compensation due to a pre-discharge claim.
You are an active-duty service member who was awarded a Purple Heart on or before the loan expiration date.
First, lenders will send in VA Form 26-8937 to confirm your exclusion from the VA funding fee.
This form verifies your VA status and whether you are eligible for a funding fee waiver.
Veterans complete the top half of the form certifying that they have (or do not) have current VA loan indebtedness. They also confirm whether they applied for disability benefits (or not).
A funding fee waiver is now provided on the eligibility certificate and disability award letter. With that information in hand, there’s no question about whether you’re eligible for it.
The ‘Home Loan Welcome Letter’ reminds veterans that they may be eligible for a waiver if they later apply for disability benefits or receive a disability award.
The VA verifies the information provided and checks the appropriate box to see if you are exempt, except for funding fees.
Please note, it is the lender’s responsibility to ensure that the VA funding fee is paid. If there is any confusion or lack of solid proof of exemption, the lender will have to collect a fee.
If the VA determines that you are exempt after closing, you can request a refund.
However, in the spring of last year, the VA made it even easier to get a VA funding fee waiver.
Are VA Funding Fees Part of Closing Costs?
The funding fee is paid at closing but is not part of the lender’s closing costs. The lender pays the fee directly to the VA after closing your loan. Like most closing costs, VA borrowers have a few options for paying funding fees:
Pay the full amount on closing. This increases the amount you will have to bring in at closing, so make sure you can afford the extra charges on top of what you already owe to close the loan. Look at your loan estimate for a complete understanding.
Add the funding fee to your loan amount. The VA allows borrowers to finance the fee. It doesn’t affect how much you can borrow to buy a home and you still don’t need a down payment.
This increases your loan amount and your monthly payment but doesn’t require you to come up with cash at closing.
Ask the seller for help. Sellers can contribute up to 4 percent of the loan amount to help pay veterans to close the loan.
Funding fees are within a maximum of 4 percent. Other fees include assistance with property taxes or insurance, more than 2 percent discount points, and collection or payment of judgments.
How to Pay VA Funding Fee
With an IRRRL or a purchase or construction loan, you can either pay the VA funding fee in full. If you cannot pay the VA funding fee in full, you can include the fee in your monthly payment.
With a cash-out refinance, you must pay the fee upfront or use the cash you withdraw to cover it.
“Generally, it’s better to pay upfront because you’re not being charged interest on that fee,” says Mark Reyes, CFP, financial advice specialist at Alberta, automated wealth management and investing app.
Final Words
The VA mortgage program is popular in the United States of America and a valuable benefit of military service.
Even with the funding fee, VA loans are a great option for those who are eligible for the program like military men, whether you’re buying a new home or refinancing your current home loan.
VA funding fees can be hefty, especially if you’re taking out a mortgage with less than 5%.
It will be important to compare the interest rate (and your down payment, if applicable) with VA funding fees and closing costs, as you need to understand whether the lump-sum fee is worth the potential savings.