VA Funding Fee Explained

VA Funding Fee Explained

VA Funding Fee 2021: What is it and What do I Pay?

VA-Funding-Fee

Veterans have access to an incredible home loan benefit – 100% financing with flexible underwriting guidelines and low closing costs.

Veterans pay a special fee called the funding fee. It’s a part of the closing costs and the VA offers ways to pay it if you can’t pay it upfront.

Keep reading to learn more about the funding fee, how it works, who may not have to pay it at all, and why it’s required.

What is a VA Funding Fee?

VA funding fee is a fee veterans pay upfront (one time) to use their VA loan benefit. The money goes directly to the VA to cover the cost of their loan guarantee.

If a borrower defaults on a VA loan, the VA pays the lender 25% of the amount they lost. Since the veterans administration has such low costs and doesn’t charge mortgage insurance, they use the reserves accumulated from the funding fee to cover lenders.

This reduces the burden taxpayers would otherwise have to pay for this benefit for our veterans.

The funding fee seems like ‘just another closing cost’ but its benefits far outweigh its cost, and the VA offers plenty of ways to afford it.

VA 2021 Funding Fee Chart

VA funding fee varies based on your down payment and the number of times you’ve used the VA loan benefit.

Most veterans pay a funding fee of 2.3 percent of the loan amount. For example, if you borrow $150,000, you’d owe $3,450 either at the closing or it can be rolled into your loan amount.

Here is the VA 2021 Funding Fee Chart:

Number of UsesDown PaymentFunding Fee
First0%2.3%
First5% – 9.99%1.65%
First10% or more1.4%
Second+0%3.6%
Second+5% – 9.99%1.65%
Second+10% or more1.4%

Who is Exempt from Paying the Funding Fee?

You are exempt from the funding fee if:

  • You were hurt and rated disabled due to your time in the service and receive VA compensation.
  • You were hurt and rated disable due to your time in the service and are eligible to receive VA compensation, but you get VA retirement pay instead.
  • You are getting your disability rating, but haven’t received it before the closing. You may pay the funding fee, but receive reimbursement once you have proof of your disability rating.
  • You received a Purple Heart.
  • You are a surviving spouse of a veteran who died in the line of duty or from complications of an injury or illness while on duty and you receive Dependence and Indemnity Compensation.

Getting the VA Funding Fee Waiver

Previously, lenders would send in VA Form 26-8937 to confirm your exclusion from the VA funding fee.

This form confirms your VA status and whether you are eligible for the funding fee waiver. Veterans completed the top half of the form certifying that they do (or do not) have a current VA loan indebtedness. They also confirm that they did (or did not) apply for disability benefits.

VA verifies the information provided and checks the appropriate box whether you are exempt or not except from the funding fee.

Starting in the spring of last year, though, the VA made it even easier to get a VA funding fee waiver. The funding fee waiver is now provided on the certificate of eligibility and the disability award letter. There’s no question whether or not you’re eligible for it with that information in hand.

In the ‘Home Loan Welcome Letter’ veterans are reminded that they ‘may’ be eligible for a waiver if they later apply for disability benefits or receive a disability award.

Please note, it’s the lender’s responsibility to ensure the VA funding fee is paid. If there is any confusion or lack of concrete proof of exemption, the lender must collect the fee. If the VA determines you’re exempt after the closing, you may request a funding fee refund (more on that below).

Is the VA Funding Fee Part of the Closing Costs?

The funding fee is paid at the closing, but it’s not a 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 to pay the funding fee:

  • Pay the full amount at the closing. This increases the amount you must bring to the closing, so make sure you can afford the extra fee on top of what you already owe to close on the loan. Look at your Loan Estimate to get a full 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 the home and you still don’t need a down payment. This increases your loan amount and your monthly payment, but you don’t need to come up with the cash at closing.
  • Ask the seller for assistance. Sellers may contribute up to 4 percent of the loan amount to help veterans pay for the loan closing. Within the 4 percent maximum is the funding fee. Other fees included are assistance with property taxes or insurance, discount points exceeding 2 percent, and paying off collections or judgments.

How to Calculate the VA Funding Fee

Your lender will determine your VA funding fee, but if you want to know ahead of time what you’ll pay, it’s easy.

You pay a percentage of your loan amount based on your down payment and whether it’s your first time or subsequent use of the VA benefits. Like we said above, most borrowers pay 2.3 percent of their loan amount because most borrowers don’t make a down payment. Any money you put down (over 5%), decreases the amount you owe.

The funding fee is a percentage of your loan amount. If your funding fee is 2.3 percent, then it’s 2.3 percent of your loan amount. Let’s look at a borrower with a $150,000 loan and various circumstances:

  • 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
  • If there is a down payment greater than 10 percent, the funding fee is $2,100

The ‘discount’ ends at 10 percent down payment, so whether you put down 10%, 20%, or more, the funding fee is 1.4 percent.

Can I Get a Refund on the VA Funding Fee?

If you’ve paid your funding fee and later find out you’re disabled, you may receive a refund.

Sometimes the Certificate of Eligibility doesn’t show the VA funding fee exemption status if your disability rating wasn’t quite clear when the VA issued it. If your claim was pending, and you needed your COE to close on the loan, you had to pay the VA funding fee. It’s the lender’s responsibility to make sure it’s paid. They aren’t going to rely on the ‘odds’ that you’ll be exempt. They’ll require you to pay it, but you may receive the money back.

Here’s how.

If you receive a disability award after the closing, but it’s dated before your closing date, you’re eligible for a refund. This applies even if you didn’t have an active application for a disability rating when you closed but later learned that you’re eligible for disability.

The key factor is the retroactive date. As long as the disability date is before the closing date, you’re eligible for a refund.

The VA, not your lender, is responsible for the refund. Contact your regional VA center and request a refund. The VA will determine a few things:

  • If you have a disability rating
  • The date the disability rating occurred
  • If you’re eligible for a VA funding fee exemption

If you are exempt and you paid the funding fee already, the VA will issue you a refund. There isn’t a deadline on when you can request the refund – some veterans even receive it after they repaid their VA loan.

The disability rating is the only way any veteran would receive a refund of the funding fee. Once you pay the fee, it’s paid. Even if you pay your loan off early, refinance, or even sell the home, you don’t receive the funding fee back. Also, any additional financing you take out (VA financing) will require the funding fee payment again.

How Much is the Funding Fee on a VA Refinance?

The VA also has refinance products. After you purchase a home (with or without a VA loan), you may use your VA loan benefit to refinance the mortgage.

The VA has two refinance programs:

  • Cash-out refinance
  • VA Interest Rate Reduction Refinance Loan

The only borrowers eligible for the VA IRRRL program are those with a current VA loan and who refinance only to lower their interest rate, refinance from an ARM to a fixed-rate, or to change the loan’s term.

Any borrower without a current VA loan or who wants to take cash out of their home’s equity must use the VA cash-out refinance. If you have VA eligibility, you can refinance a conventional or FHA loan using your VA loan benefit. You may also refinance to take cash out of your home’s equity.

The VA has two funding fees for the cash-out refinance – a first-time funding fee and a subsequent use funding fee. Down payments or equity don’t matter in this case.

If you use the VA cash-out refinance option, you’ll pay 2.3 percent of the loan amount for the first use. On any subsequent uses of the program, you’ll pay 3.6 percent of the loan amount.

Using our $150,000 example, you’d pay $3,450 the first time and $5,400 any subsequent times. Like the home purchase, you can pay the fee at the closing or wrap it into your loan amount. Since there’s no seller in a refinance, these are your only two options.

Is There a Funding Fee on the VA IRRRL?

The VA Interest Rate Reduction Refinance Loan helps veterans make the most of their loans. You must prove you benefit from the refinance (save money) to get approved, so it makes sense that the funding fee is much lower for this program.

Veterans with a current VA loan who benefit from refinancing with the VA IRRRL program pay a funding fee of just 0.5 percent of the loan amount. This helps keep the program affordable and so that it provides veterans with a benefit to refinance.

What is the Funding Fee for Second Time Use?

If you’ve used your VA home loan benefit before, you don’t qualify for the first-time use funding fee. Instead, you’ll pay a higher fee for using it again.

It’s important to know that you can reuse your benefit. The VA home loan benefit helps veterans secure a home to live in full-time (primary residence).

If you move (sell the home and pay off the loan), you may apply for reinstatement of your eligibility. This allows you to use your VA loan benefit on a subsequent home.

If you are keeping your current home, and are wanting to purchase another, you must be able to qualify for both mortgage payments at the same time.

The VA funding fee for subsequent use and no down payment is 3.6 percent. On our $150,000 example, that’s $5,400.

No matter what the situation, though, you’ll pay the subsequent use VA funding fee (unless exempt)

What is the VA Funding Fee for Disabled Vets?

The VA funding fee for disabled vets is the same as non-disabled vets UNLESS you qualify for a VA funding fee exemption.

If you receive disability pay, you may not have to pay the funding fee. Check your Certificate of Eligibility for VA funding fee exemption. If your COE doesn’t show it, but you think you’re eligible for the exemption, contact your local VA office.

If you’re eligible for the exemption, you don’t owe anything for the funding fee, which is a nice savings for disabled veterans.

What Happens to the Funding Fee When Two Veterans Buy a Home?

The VA loan is for veterans only unless you’re married. The VA considers the purchase of a home between a veteran and his/her spouse as veterans buying the home. In other words, your benefits don’t change.

But, in the rare circumstance that you buy a home with another veteran, there could be some changes to the VA funding fee.

If neither veteran has a VA funding fee exemption, the standard funding fees apply. You pay one fee for the loan (it’s up to you how you split the cost).

If, however, one veteran is disabled AND contributes his/her entitlement to the loan (provides his/her COE), the funding fee is cut in half. The half the disabled veteran would pay is waived, but the half for the non-exempt veteran still exists.

It comes down to which borrower (one or both) is using his/her entitlement to buy the home.

Is the VA Funding Fee Worth It?

It’s easy to look at the VA funding fee as another closing cost, making it unaffordable to buy a home. But, the VA funding fee has a purpose and it makes owning a home more affordable.

Here’s how.

Without the funding fee, lenders wouldn’t have such lenient guidelines for the loan program. As it stands, the VA loan allows low credit scores (the average lender allows credit scores as low as 620) with no down payment. No other loan program comes close to those benefits.

The funding fee helps the VA offer this benefit. Plus, you can get help paying it if you can’t afford it at the closing. Whether you wrap it into your loan amount and increase your loan payment by a few dollars or you ask the seller to help you pay it, the funding fee is beneficial for veterans.

FAQ

Do VA funding fees change?

Previously, the VA funding fee remained the same from 2011 – 2019. The latest funding fee became effective for 2020 and is set to remain the same until January 1, 2022. At that point, it may change.

Why does the VA charge a funding fee?

The funding fee helps continue the VA loan program which provides affordable loan options for veterans, including no down payment requirement. The VA guarantees the loan for lenders. Without the guarantee, most lenders wouldn’t be able to approve loans with credit scores as low as 620 and no down payment.

How do you access your VA loan benefit?

You secure a VA loan from a private VA loan lender – the VA only guarantees the loans. They don’t underwrite or fund the loans. You need your Certificate of Eligibility to prove you are eligible for the VA loan program. If you don’t have your COE, your lender can help you get it.

Is the VA funding fee tax-deductible?

Unlike most other closing costs, you can deduct your VA funding fee on your taxes. This is a nice way to save money on your taxes and your mortgage. Your mortgage tax form 1098, will show the amount you can deduct in Box 5.

Do sellers not like VA loans?

It’s true, some sellers don’t like VA loans, but they aren’t the majority. The dislike stems from myths the VA loans have had for decades. Some sellers still believe the appraisals are hard to get approved and sellers must foot the bill for the closing costs. Neither is true. You can pay all closing costs yourself and the appraisal isn’t any harder than any other loan. VA loans help veterans buy a home faster and easier but are still easy for sellers to handle.

Is the VA funding fee negotiable?

The VA funding fee is non-negotiable. You pay the fees according to the type of loan (purchase or refinance), your down payment, and whether you’ve used the VA home loan benefit before or not.

Are there other VA loan closing costs?

VA loans, like all other loans, have closing costs. You’ll pay traditional lender fees, and third-party fees including title insurance fees, attorney fees, credit report fees, underwriting fees, and appraisal fees. The VA only collects the funding fee payment, nothing else.

Who determines your VA loan fees?

The VA doesn’t determine any fees except for the funding fee. All other costs you are charged are determined by the lender. You may pay discount fees, origination fees, underwriting fees, or processing fees for the lender.

Is a VA loan worth it?

If you’re a veteran, the VA loan is worth it. You can secure financing with no money down at affordable rates (and closing costs). It’s a great way to become a homeowner without worrying about saving for a down payment or paying excessive fees.

Don’t let the VA funding fee keep you from getting VA financing. The funding fee keeps the VA afloat, allowing them to help veterans like you. It’s a small fee veterans pay in exchange for a beneficial program that exceeds any other program on the market.

If you can’t afford the funding fee at the closing, you have options. Talk to your loan officer about the options available to you and get the VA financing you deserve.

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