What is the VA Funding Fee
For most VA purchase money loans, the answer is a direct 2.15%. But the funding fee is more than just a number or a percentage but a key ingredient in the entire VA home loan program. Let’s break down what the funding fee is, its origin and why it’s necessary to include with a VA home loan. The VA home loan program is just one of three government-backed loans that provide lenders who make these loans with some sort of compensation. The other two such loans are the FHA and USDA program. The FHA and USDA loans carry an inherent guarantee that compensates the lender in the event of the loss.
The VA loan also has its guarantee but limits the compensation to 25% of the loss. The issuance of a claim on a defaulted VA loan however is extremely low as the VA home loan program carries the lowest default rate of any loan program available in today’s mortgage marketplace, despite the lack of a down payment.
There are different levels of the funding fee that depends on how many times the veteran has used the VA home loan program, any amount of down payment, the term of the loan and the type of service in which the borrower was enlisted. The funding fee can range anywhere from 1.25 percent to 3.3 percent. Cash out refinance loans for example command the highest funding fee while someone with a 10 percent down payment gets the lowest. VA loans with down payments however are very rare.
The funding fee for first time use with zero down is 2.15% for eligible borrowers. Yet this fee does not have to be paid for out of pocket and is rolled into the loan amount. The funding fee in reality is a form of mortgage insurance payable in favor of the lender. FHA and USDA loans also have an initial premium but also have a monthly premium payment made. VA loans have no such monthly payment toward a funding fee or any other form of mortgage insurance. And while the funding fee may be rolled into the loan amount there is no requirement to do so. The veteran can pay for the fee out of pocket if so chosen but most every borrower does take advantage of the fact this fee can be financed and is a real cost-saver.
For example, a veteran is buying a $300,000 home with zero down and using a 30 year fixed rate loan to finance the transaction. At 2.15% the funding fee is then $4,300. That’s no trivial amount when considering closing costs associated with any mortgage but is rolled into the loan providing less cash to close for the borrower.
There are a couple of exceptions when this fee is waived entirely. For veterans who are receiving disability payments each month as a result of a service-related issue, they are exempt from paying the funding fee. Surviving spouses of those who have died while serving or as a result of a service-related injury also qualify for the exemption.