How VA Determines Funding Fee Cost?
Eligible veterans and other homebuyers who were able to obtain a Certificate of Eligibility or COE may start using their VA home loan benefits, especially this year that they can apply for a higher loan amount to buy their dream home. Without the need of putting a down payment and with no mortgage insurance requirements are, by far, the most significant advantages of taking out a VA loan to buy a home. The U.S. Department of Veterans Affairs (VA), however, requires veterans to pay a funding fee.
Typically, the VA determines the cost of the funding fee based on the loan amount and type of loan the veteran had applied for. Expressed in percentage of the total loan amount, the funding fee cost also depends on the borrower’s military category, if it’s the first time the borrower will utilize a VA home loan benefit, and if a borrower chose to put a down payment.
Veterans who will utilize their VA loan benefits for the first time to buy a home with a 0% down payment should expect a 2.3 percent funding fee of the total loan amount they have been approved to borrow. For example, if a veteran is approved to borrow $500,000, the VA will require him or her to pay a one-time funding fee worth $11,500 ($11,500 is 2.3 percent of $500,000). The VA charges a 3.6 percent funding fee for subsequent VA loan borrowers.
Veterans may lower the cost of their funding fee if they decide to put a down payment. Generally, veterans may lower the funding fee cost up to 1.4 percent of the total loan amount if they put a 10 percent down payment or more.
VA funding fee in a nutshell
Veterans, active service members, and spouses who are eligible to utilize VA-backed or a VA direct home loan are required to pay a funding fee to help reduce the cost of the loan for taxpayers. The funding fee is also a requirement for veterans who will utilize a VA loan to repair their homes or refinance their mortgages.
Upon closing a VA-backed or VA direct home loan, veterans could either pay the funding fee through financing (by including the funding fee in the loan and pay it off over time) or pay the full amount upfront. In some situations, the veteran homebuyer may negotiate for the seller to pay the funding fee.
Funding fee exemptions
There are certain conditions when the VA will exempt an eligible VA loan borrower to pay a funding fee. In 2020, active duty service members who have been awarded a Purple Heart are now exempted to pay a funding fee. Veterans who are receiving compensations from a service-connected disability and those who are receiving retirement or active-duty pay instead although eligible for service-connected disability benefits are not required to pay a funding fee. Moreover, the surviving spouse of a veteran is also exempted from paying funding fee if his or her loved one died while in service or from a service-connected disability.
Get in touch with a loan advisor
VA Funding fee is just one of the several costs that veterans need to settle upon closing. Veterans who plan to utilize their VA home loan benefits for the first time may want to get in touch with a loan advisor to help them better understand their financial goals when buying a home.