The funding fee has increased for 2020, and it can be expensive — potentially costing thousands of dollars. But there are ways to reduce it, and you may find that you qualify for an exemption and don't have to pay the funding fee at all.

What is the VA funding fee?

SIde view of a young adult African American male soldier in the garden outside his home, holding his young son and swinging him around, both smiling, their house in the background
wavebreakmedia / Shutterstock
When you buy a home with a VA loan, the funding fee helps defray the VA's costs.

When you take out a VA loan help you buy, build or make repairs to a home, you don't borrow directly from the Veterans Affairs Department but from a private lender working with the agency.

The VA guarantees the loan, meaning the department agrees to pay back a portion of the money if you stop making your payments.

The funding fee goes directly to the VA to help with the costs the agency incurs from borrowers who default.

In exchange for competitive interest rates and looser credit standards, most borrowers are required to pay the fee, which is calculated as a percentage of the loan amount.

The percentage can vary, depending on whether you're making a down payment and whether you've ever used a VA-guaranteed loan before. It can be as high as 3.6% or as low as 1.4%.

Veterans: $0 Down, No PMI and Lower Monthly Payments. Get Started with Veterans United Home Loans.

How much is the VA loan funding fee?

Newcomers to the program and borrowers willing to put at least 10% down pay the smallest fees, on a percentage basis.

With the 2020 increase included, this is how the VA funding fee is calculated for "purchase loans" — loans used to buy homes.

VA Funding Fees for Purchase Loans in 2020
Service Down payment Funding fee for 1st-time VA loan user Funding fee for repeat user
Regular military 0 to 4.9% 2.3% 3.6%
5% to 9.9% 1.65% 1.65%
10% and up 1.25% 1.25%
Reserves / National Guard 0 to 4.9% 2.3% 3.6%
5% to 9.9% 1.65% 1.65%
10% and up 1.25% 1.25%

While making a down payment isn’t required for a VA loan, choosing to do so can significantly lower your funding fee. But that means pulling together a large amount of cash, which isn't an easy feat for many military households.

If you use a VA loan to do a cash-out refinance — borrowing more than you owe to provide some cash for home repairs or other purposes — the fees are similar to those for purchase loans, though you can't cut your funding fee by making a down payment.

VA Loan Cash-Out Refi Funding Fees in 2020
Service Funding fee for 1st-time user Funding fee for repeat user
Regular military 2.3% 3.6%
Reserves / National Guard 2.3% 3.6%

The VA also offers its Interest Rate Reduction Refinance Loan, or IRRRL — often referred to as "Earl" and sometimes called a "streamline refinance." With this refi, a homeowner who has a VA loan can move into a new one at a lower mortgage rate, or can trade an adjustable-rate mortgage for a fixed-rate loan.

The IRRRL funding fee is a straight 0.5% of the loan amount for all borrowers — unless they've earned an exemption.

How to get an exemption from the funding fee

Veteran in wheelchair returned from army. Close-up photo veteran in a wheelchair. Wheelchairs and legs in military uniform.
VGstockstudio / Shutterstock
Disabled veterans are exempt from paying the funding fee.

The VA loan program takes into consideration the particular circumstances of each service member and tailors a loan's terms and fees accordingly.

These categories of borrowers have traditionally been exempted from paying the funding fee:

  • Veterans who receive or qualify for compensation because of a service-related disability.
  • Surviving spouses of military members who died in the service or from a service-related disability.

The new law that increased the funding fee on Jan. 1, 2020, also added a new exemption for:

  • Active duty service members who have earned a Purple Heart.

A veteran who closes on a home loan, pays the funding fee and becomes eligible for disability payments retroactively — going back before the closing — may be able to get a funding fee refund.

How to pay the funding fee

For many service members and veterans who are not exempt, the VA loan funding fee can come as an unpleasant surprise.

If you secure your first VA loan in the amount of $200,000 and choose not to make a down payment, you'll need to pay an additional $4,600 (2.3%) when you sign your mortgage paperwork. There's no getting around that.

"You have the option to finance the VA funding fee or pay it in cash, but the funding fee must be paid at closing time," the Department of Veterans Affairs says, on its website.

Financing the funding fee means rolling it into your loan amount and paying it off via your monthly mortgage payments — meaning the fee will increase your interest costs over time.

Adding $4,600 to $200,000 loan at 3.6% interest could have you paying close to an additional $3,000 in interest over the life of a 30-year loan.

As with making a down payment, paying the funding fee upfront can be a stretch for many service members and military families. But if you're able to do it, you'll save money in the long run.

Additional VA loan costs

building, mortgage, investment, real estate and property concept - close up of home or house model and money
Syda Productions / Shutterstock
Closing costs for VA loans can be as high as 5% of the loan

Besides the funding fee, VA home loans come with a handful of other costs.

The government's rules say commissions and brokerage fees may not be charged to buyers using VA loans.

But closing costs for veterans and service members in the program can run as high as 5% of the loan amount.

The Department of Veterans Affairs allows home sellers to cover some closing costs, up to 4% of the amount of the loan amount. But the buyer/borrower must pay the rest, including all state and local taxes and the full cost of the VA appraisal, which assesses the home's fair market value and whether it's sound.

VA loans are a great deal, but it's up to you to do your research so you're not hit with improper charges and wind up paying more than you should. You want to get the best deal possible.

Find a Lender: Check your eligibility with Veterans United Home Loans.

About the Author

Josh Wilson

Josh Wilson

Freelance Contributor

Josh is a freelance contributor to MoneyWise.

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