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The VA funding fee is a one-time charge required by the U.S. Department of Veterans Affairs on all VA-backed home loans. This fee, typically ranging from 0.5% to 3.6% of the loan amount, helps sustain the VA loan program, enabling benefits like no down payment and no private mortgage insurance (PMI) for qualified military members and veterans. While the fee can be paid upfront at closing, most borrowers choose to finance it into their total loan. Crucially, some borrowers may be eligible for a full exemption from this cost.
A VA funding fee is a mandatory, one-time payment made to the Department of Veterans Affairs when obtaining a VA loan. Unlike ongoing mortgage insurance, this fee is charged once to help fund the program's administrative costs, ensuring it remains available for future service members. The key advantage is that this fee can be rolled into the loan balance, eliminating a large upfront cash requirement at closing.
The exact percentage you pay depends on three primary factors: your down payment amount, whether it's your first or subsequent use of a VA loan, and the type of loan you are getting. The following tables, based on VA guidelines effective from January 2020 (the most current available), illustrate the standard rates.
Purchase and Construction Loans
| Down Payment | First-Time Use Fee | Subsequent Use Fee |
|---|---|---|
| Less than 5% | 2.3% | 3.6% |
| 5% or more | 1.65% | 1.65% |
| 10% or more | 1.4% | 1.4% |
Refinance Loans
| Loan Type | First-Time Use Fee | Subsequent Use Fee |
|---|---|---|
| VA Cash-Out Refinance | 2.3% | 3.6% |
| IRRRL (Interest Rate Reduction Refinance Loan) | 0.5% | 0.5% |
An IRRRL is a streamlined refinance option specifically for existing VA loans to secure a lower interest rate. As shown, making a down payment of 5% or more on a purchase loan can significantly reduce your funding fee.
It is essential to distinguish the VA funding fee from Private Mortgage Insurance (PMI), which is a monthly premium required on conventional loans with a down payment of less than 20%. PMI protects the lender from potential default. The VA funding fee, by contrast, is a one-time charge that supports a government program. VA loans never require PMI, which is a significant long-term savings, even with the upfront funding fee.
You may be eligible to have the funding fee waived entirely if you meet certain criteria. Based on our experience assessment, common exemption scenarios include:
If your disability rating is awarded after your loan closes, you may be eligible for a refund of the fee, provided the effective date of the disability is before your loan closing date.
You have several options for covering this cost at closing:
Example: For a $300,000 home purchase with no down payment and first-time VA loan use, the 2.3% funding fee would be $6,900. You could finance this, resulting in a total loan of $306,900.
Yes, the VA funding fee is generally tax-deductible for the year you pay it if you itemize your deductions on your federal income tax return. We strongly recommend consulting with a qualified tax professional to understand how this deduction applies to your specific financial situation.
In summary, the key to managing your VA funding fee is understanding how your down payment affects the cost and knowing if you qualify for an exemption. Always consult with a VA-approved lender to get an accurate estimate for your specific scenario.
