Navigating the VA Funding Fee: Understanding Costs, Types of Loans, and Payment Options
As a member of the U.S. military or a veteran, one of the benefits of serving your country is gaining access to VA direct and VA-backed home loans. These loans offer low-cost mortgages to veterans, service members, and their survivors, with no down payment or mortgage insurance required and limited closing costs. However, VA loans come with a one-time fee called the VA funding fee, which is designed to offset the cost of lenders providing these loans. In this article, we'll explore how the VA funding fee works, what types of loans have VA funding fees, how much the fee is, how to pay it, and who is required to pay it.
How Does the VA Funding Fee Work?
The VA funding fee is a one-time fee that eligible borrowers must pay at closing to help defray the cost of the VA guarantee on their loan. The VA guarantees a portion of the loan in case of borrower default, which allows lenders to offer more favorable terms. The current VA funding fee for purchase loans ranges from 1.25% to 3.3% of your total loan amount, depending on factors such as the type of loan, down payment size, and previous use of the VA loan benefit. For refinances and loan assumptions, the fee can be as low as 0.5% of your loan amount.
What Types of Loans Have VA Funding Fees?
There are several types of home loans that eligible borrowers may access through the VA loan program, including:
- Loan for buying a house
- VA construction loan
- Loan for a manufactured home
- VA cash-out refinancing loan
- VA streamline refinance (also known as interest rate reduction refinancing loan or IRRRL)
In addition to these loans, the VA also charges a funding fee for less common loans such as Native American Direct Loans, loan assumptions, and vendee loans for borrowers purchasing a property acquired by the VA.
How Much Is the VA Funding Fee?
The amount of the VA funding fee varies depending on the type of loan and whether it is your first use. For example, if you purchase a $250,000 house using a VA loan for the first time without a down payment, your VA funding fee is 2.15%, or $5,375. For cash-out refinancing loans, the fee is between 2.15% and 3.3% if it is your first use. If you are using a VA loan to refinance your mortgage to improve your interest rate or purchase a manufactured home, the fee is always 1%.
How Do I Pay the VA Funding Fee?
You have two options for paying the VA funding fee: you can pay it as a lump sum at closing or have it added to your total loan amount. While financing the fee by adding it to your loan total will lower your out-of-pocket costs at closing, it will increase the amount of interest you pay on your loan over time.
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