VA Funding Fee: Understanding Costs and Benefits

The VA funding fee is a mandatory cost associated with VA loans that helps sustain the VA loan program.

Let us see the purpose of VA funding fee and their significance in VA loans.

What is a VA Funding Fee?

The VA funding fee is a mandatory fee applied to VA loans. It helps sustain the VA loan program and allows eligible veterans, active-duty service members, and certain surviving spouses to access the benefits of VA loans.

The fee is a percentage of the loan amount and can be paid upfront or added to the loan balance. It varies based on factors like the borrower’s military category, down payment amount, and whether it’s their first or subsequent use of the VA loan benefit.

The funding fee ensures the continued availability of VA loan options and supports the benefits provided to those who have served in the military.

Is there any difference between VA Funding Fee and Mortgage Insurance?

Yes, there is a difference between the VA Funding Fee and mortgage insurance.

The VA Funding Fee is a one-time fee paid upfront or rolled into the loan amount on VA loans. It is required by the Department of Veterans Affairs and helps sustain the VA loan program.

The funding fee amount varies based on factors such as the borrower’s military category, down payment, and loan type. It acts as a cost associated with accessing the benefits of a VA loan.

On the other hand, mortgage insurance is typically required for conventional loans with a down payment of less than 20%.

It is an ongoing monthly or annual premium paid by the borrower to protect the lender in case of loan default.

Mortgage insurance is not specific to VA loans and is typically not required for VA loans, which is one of the advantages of this type of loan.

In summary, while the Fee is a one-time fee associated with VA loans, mortgage insurance is an ongoing premium required for some conventional loans to protect lenders against default.

Why Is The Funding Fee For VA Loans Charged?

The funding fee for VA loans is charged to support the financial sustainability of the Department of Veterans Affairs home loan program.

It helps cover program costs, ensure the availability of future loans, maintain the program’s viability, and equalize costs among borrowers.

By charging the funding fee, the VA can continue to offer favorable loan terms and benefits to veterans and service members while minimizing reliance on taxpayer funding.

What is the Cost of the VA Funding Fee?

The cost of this fee varies depending on several factors. It includes the type of military service, the down payment amount, and whether it’s the borrower’s first or subsequent use of the VA loan benefit.

As of my knowledge cutoff in September 2021, the funding fee rates for regular military service members ranged from 0.50% to 3.60% of the loan amount, depending on the down payment percentage.

For Reservists and National Guard members, the funding fee rates ranged from 1.25% to 3.60% of the loan amount.

It’s important to note that these rates are subject to change, and it’s advisable to consult with a VA-approved lender or the VA itself to obtain the most up-to-date information on funding fee rates.

Additionally, certain borrowers, such as those with service-related disabilities or surviving spouses, may be eligible for exemptions or reduced funding fees.

How Is the Fee Paid?

The funding fee can be paid in a few different ways:

• Upfront Payment: Borrowers have the option to pay the funding fee upfront as a one-time cost at the time of loan closing. This can be done using personal funds or by including the fee in the form of a cashier’s check or wire transfer.
• Financing the Fee: Borrowers also have the option to finance the funding fee as part of the loan amount. Instead of paying the fee upfront, it is added to the total loan balance and paid off over the course of the loan term through regular mortgage payments.

The choice between paying upfront or financing the fee depends on the borrower’s preferences and financial circumstances.

Financing the funding fee allows borrowers to spread out the cost over the life of the loan, while paying upfront eliminates the need to pay interest on the fee amount over time.

Borrowers should discuss these options with their VA-approved lender to determine the best approach for their specific situation.

Do VA Funding Fees Have Any Exemptions?

Yes, there are exemptions and reductions available for VA loan funding fees. Here are some common exemptions:

• Service-Connected Disability: Veterans who have a service-connected disability, as determined by the VA, are typically exempt from paying the funding fee. This exemption is available regardless of the percentage of disability.
• Surviving Spouses: Surviving spouses of veterans who died in service or as a result of a service-connected disability may be exempt from the funding fee.

In addition, there are also reductions in the VA funding fee exemption for certain categories of borrowers:

• Reservists and National Guard: Reservists and National Guard members typically pay slightly higher funding fees compared to regular military service members. However, they may be eligible for a reduction in the funding fee if they have completed at least six years of service in the Reserves or National Guard.
• Subsequent Use: For borrowers who have used the VA loan benefit before, the funding fee may be slightly higher. However, the fee can be reduced if a down payment of at least 5% is made.

Is There A Refund Policy For VA Funding Fees?

There are certain situations where a borrower may be eligible for a of the VA funding fee refund.

Here are some scenarios where a refund may be possible:

• Funding Fee Overpayment: If a borrower has overpaid the funding fee amount, they may be eligible for a refund of the excess amount paid.
• Disability Retroactive Determination: If a veteran’s service-connected disability is determined or increased after the loan closing, and they had paid a funding fee, they may be eligible for a refund of the funding fee. This refund is retroactive to the date of disability determination.
• Loan Discharge: In the event of a loan discharge, such as a loan being paid off or refinanced within a certain timeframe, a borrower may be eligible for a partial refund of the funding fee.

Conclusion

Summarize the key points discussed in the guide and emphasize the importance of understanding funding fees for borrowers considering VA loans. Offer additional resources or next steps for readers to explore further information about funding fee.

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