For those who qualify, there is no better mortgage option which requires no money down, reduced fees and no monthly mortgage insurance.VA Funding Fee…
On top of those stellar benefits, the VA actually guarantees a portion of a VA loan that goes into foreclosure. That’s actually very rare as VA loans have the lowest default rate of any mortgage product in the market today. Lenders, as long as proper VA guidelines were used when approving a VA loan, are guaranteed 25 percent of the loan in the case of default.
This guarantee is financed by what the Department of Veteran’s Affairs calls the Funding Fee. The funding fee is expressed as a percentage of the loan amount and can vary based upon the nature of the loan and the status of the borrower. The nature of the loan refers to how the loan is being used. If it’s a first-time purchase the funding fee will be different compared to a VA loan that is being refinanced and pulling cash out at the same time. The funding fee can also vary based upon the existence of any down payment. Just because VA loans don’t require a down payment doesn’t mean the borrower isn’t allowed to place a down payment.
There needs to be a reminder that the VA home loan program isn’t just reserved for veterans. Active-duty personnel also qualify with a minimum of 181 days of service. So too are veterans and active duty members of the National Guard and Armed Forces Reserves with at least six years of service. Surviving spouses of military members who died while on duty or as a result of a service-related injury qualify as long as the surviving spouse has not remarried are eligible as well.
The funding fee can be paid out of pocket but very rarely is. The funding fee is one of the few closing costs of any mortgage that can be rolled into the loan amount during a purchase transaction. The loan amount increases slightly due to this but the impact is minimal. Other closing costs associated with a VA loan include a charge for an appraisal, credit report, origination fee, recording fee, title insurance and a survey. All other charges, and there are several, cannot be paid for by the veteran. The seller can pay the veteran’s fees and the lender can structure a lender credit toward closing costs. In certain areas of the country, there are also housing grants that can be issued to qualifying borrowers that can be used to offset the closing costs on a VA home loan. Let’s look at a few scenarios to find out how much the veteran pays toward the funding fee.
First Time Use
| Down Payment | Veteran/Active Duty | Guard or Reserve |
| $0 | 2.15% | 2.40% |
| 5-10% | 1.50% | 1.75% |
| 10% > | 1.25% | 1.50% |
Using this chart for a veteran using the home loan benefit for the first time, the funding fee amount is 2.15% of the loan amount. The loan amount is then increased slightly to accommodate the funding fee. For a qualified National Guard member with 5.00% down, the funding fee is 1.75% and so on. Here are the remaining funding fee charts:
Purchase – Second Use
| Down Payment | Veteran/Active Duty | Guard or Reserve |
| $0 | 3.30% | 3.30% |
| 5-10% | 1.50% | 1.75% |
| 10% > | 1.25% | 1.50% |
Let’s say an active duty soldier with one-year of service decides to buy a first home using the VA home loan benefit with no down payment. From the first chart we see that qualifying active duty personnel have a funding fee of 2.15% of the loan amount. On a $200,000 purchase and no money down, the final loan amount is $204,300 by rolling in the $4,300 funding fee amount.
When using the VA loan to buy another home in the future with restored entitlement and no down payment, the funding fee increases to 3.30% of the loan, and so on.
Now let’s look at refinancing scenarios:
Cash-Out Refinance
| Use | Veteran/Active Duty | Guard or Reserve |
| First Time | 2.15% | 2.40% |
| Subsequent Use | 3.30% | 3.30% |
Streamline Refinance (IRRRL)
| Use | Veteran/Active Duty | Guard or Reserve |
| First Time | 0.5% | 0.5% |
| Subsequent Use | 0.5% | 0.5% |
When a borrower refinances an existing loan and uses the VA program, if the existing loan is not a VA mortgage, the funding fee for a cash out refinance is the same as for the original purchase, at 2.15%. When refinancing an existing VA loan, the funding fee drops to 0.5% for both veteran/active duty as well as Guard or Reserve.
If the funding fee looks more like an insurance premium, that’s because it really is. The premium is financed by the funding fee and paid out over time by the borrowers as part of the amount borrowed. As long as the loan was properly underwritten, the lender will be compensated for a portion of the loss.
