I think we can all agree that the VA loan program is one of the best benefits available to both veterans and current service members. Just the fact that the VA will literally guarantee 25% of your mortgage up to the current loan limits is pretty amazing. If only one person defaults on paying their mortgage, they are potentially on the hook for over $120,000. Have you ever wondered where that money comes from? How does the program sustain itself? Will it ever run out of money? A big part of the answers to these questions is the VA Funding Fee.
Even taking the funding fee into account, the benefits of a VA loan usually outweigh the costs. Most service members and/or veterans have been too busy serving out their tour to worry about saving money for their future. If you’ve spent four, eight, twelve or more years in the military, you may be behind the eight ball when it comes to saving for a home. The government recognizes this, and created the VA Loan Program to give you a leg up when it comes time to purchase a new house. When you apply for a VA home loan, there is no down payment required and you are not penalized with Private Mortgage Insurance. That is a huge advantage to you as a borrower. Being able to finance 100% of the purchase price not only gives you the ability to buy more house, it allows you to buy quickly, without having to take time to save for a down payment. This could literally allow you to buy a house years earlier than you normally would.
So what is the VA funding fee exactly? It’s a fee that goes directly to the VA to eliminate the cost of the program to taxpayers. It does not come from the lender. You can think of it as a sort of convenience fee to make up for the fact that there is no down payment or Private Mortgage Insurance (PMI) associated with the VA loan programs. It’s actually interesting that the VA loan program doesn’t take any money from taxpayers. It is a self-sustaining platform supported by service members for other service members/veterans. Having the funding fee in place protects the borrowing rights of future service members and veterans. The fee is charged to almost every VA loan that is approved and processed (there are some exceptions), and is calculated using a percentage of the total amount of the loan.
2019 VA Funding Fee Chart
How do you know what percentage you will be responsible for? It’s determined by several factors, including whether you choose to make a voluntary down payment, if you’re a first time user, and/or your military category. Take a look at the 2019 VA funding fee chart for purchase and construction loans below.
|Type of Veteran||Down Payment||Percentage for First Time Use||Percentage for Subsequent Use|
|5% or more||1.50%||1.50%|
|10% or more||1.25%||1.25%|
|5% or more||1.75%||1.75%|
|10% or more||1.50%||1.50%|
Let’s assume you are a regular military veteran using their benefit for the first time, and you choose not to put any money down on the mortgage. Using the VA funding fee schedule above, you can see that your fee is 2.15% of the final amount of the loan. If the purchase price of your home is $350,000, you will pay a funding fee of $7,525.00. If you happen to have some money for a down payment, putting 5% down on the loan (a total of $17,500.00) will reduce the fee down to $5,250.00.
VA Cash Out Refinance Funding Fee Chart
The fee schedule is different if you are refinancing, and then again based on what type of refinance you’re looking for. The chart below is for a cash out refinance. This loan replaces your existing VA loan with a brand new one, and allows you to draw cash out of the loan at closing.
|Type of Veteran||Percentage for First Time Use||Percentage for Subsequent Use|
Based on the above, the fee for a regular military veteran for a first-time cash out refinance is 2.15% of the total cost of the loan. For any additional refinances, the rate increases to 3.30%. The rate is slightly higher if you are a member of the National Guard/Reserves.
VA IRRRL Funding Fee Chart
The types of loans that have the lowest funding fees are IRRRLs (Interest Rate Reduction Refinance Loans), manufactured home loans and loan assumptions. For these three types of loans, it does not matter if you are regular military or part of the Reserves/National Guard. Check out the chart below and then we’ll discuss the differences.
|Type of Loan||Percentage for Either Type of Veteran Whether First Time or Subsequent Use|
|Manufactured Home Loans (NOT permanently affixed)||1.00%|
The IRRRL loan, also known as a VA streamline loan or a VA to VA loan, is intended to be an efficient way for you to replace your current VA loan with a new, lower interest rate loan.
Manufactured homes are built in sections, at a factory and assembled onsite. As long as it has permanent cooking, eating, sleeping and sanitary facilities, it qualifies for VA financing. A VA loan assumption means a potential buyer will take on the responsibility of the current mortgage. So if you happen to know someone that owns a home with a VA mortgage, and they need to sell, you can assume the mortgage as is from that person. As you can see, the IRRRL VA funding fee and the VA loan assumption fee are substantially smaller than the fees for an outright purchase loan. This is likely because both loans are not changing much in the total amount already backed by the VA.
VA Funding Fee Exemption
There are some cases where you can qualify for a VA funding fee exemption. You’re eligible for an exception if you receive compensation for a service connected disability, or if you are a surviving spouse of a Veteran who died in service or due to a disability. Having this fee waived is not automatic. You have to submit an application to the VA along with your Certificate of Eligibility (COE), your signed VA Form 26-8937 and your original notification of disability rating. Your disability rating must be 10% or higher in order to qualify. Once the VA has all that documentation, they will decide whether or not you are exempt.
- Veterans who receive compensation for service-connected disabilities
- Veterans who would receive disability compensation if they didn’t receive retirement pay
- Veterans who are rated as eligible to receive compensation on the basis of a pre-discharge exam or review
- Veterans who can but are not receiving compensation because they’re on active duty
- Surviving spouses who are eligible for a VA loan
But what happens if you have a disability claim pending that gets approved after closing? Or you didn’t realize you were eligible for disability benefits, and the disability is traceable to an event that happened prior to the closing? In those cases, you may qualify for a VA Funding Fee refund. Although the VA is ultimately in charge of whether you qualify for a refund, you can start the process by discussing it with your lender.
The Funding Fee is collected by the lender as part of the closing costs associated with the loan. The lender collects the fee and forwards the payment to the Veteran’s Administration automatically. The lender is simply a passive third party when it comes to the funding fee – they have no authority over whether you are exempt or how much you are supposed to pay. They are only there to collect the money and forward it to the VA. If you are not exempt, you have three options on how you can pay the fee. The most popular options are to either pay the entire fee out of pocket, or roll the funding fee into the balance of the loan. Most borrowers choose to roll the fee into the balance of the loan. Keep in mind that if you are already financing 100% of the purchase price of the house, rolling in the fee causes you to owe more on the house than the home is worth, putting you underwater on your mortgage. While this could be a potential issue if you need to sell the house quickly, it’s less of a concern if you are planning on staying in the house for a long period of time. If you do have the money to pay the fee out of pocket, not only will you keep you from being underwater, you’ll save money on the long-term interest.
The third option can work in your favor if you have a very motivated seller. If the house you are looking to buy has been on the market for some time, or if they need to sell quickly for another reason, you may be able to negotiate with the seller to cover the funding fee. This is known as a seller concession. The catch with seller concessions is that the value of all concessions can’t exceed more than 4% of the appraised value of the home. That means that if the house is appraised at $300,000, you are allowed $12,000 in seller concessions. In most cases, this leaves plenty of room to cover the funding fee. Be sure to bring this up with your real estate agent early on in the process so they can help you negotiate concessions when you make your initial offer on the house.
One other thing that people often find confusing with regard to closing costs is the difference between the Origination Fee and the Funding Fee. The VA funding fee is completely separate from the loan origination fee. The loan origination fee is charged directly by the lender to recover their costs in handling the loan. It is a lump sum that contains the administration, notary, underwriting and attorney fees paid out by the lender while processing your mortgage. VA regulations state that the origination fee is not allowed to exceed 1% of the total amount borrowed. The biggest difference between the two is that the funding fee goes directly to the VA to fund the program, and the origination fee goes to the lender to cover their costs.
Everything you’ve read up to this point remains in effect until December 31, 2019. Starting in 2020, VA funding fee changes are going into effect. On June 25th 2019, President Trump signed a bill lifting the loan guarantee limit starting January 1, 2020. Currently, in most areas, The VA guarantees 25% of your home loan up to the max limit of $484,351. In certain counties that are considered to have a higher cost of living, the loan limit is $726,525. The Blue Water Navy Vietnam Veterans Act (H.R. 299) lifts these limits, and also makes some changes to the fee schedule for VA loans. The VA Funding Fee will see a slight increase of 0.15% – 0.30% for most people. The bill also eliminates the difference in the funding fee between veterans and members of the National Guard/Reserve, so all service members and veterans will pay the same amount. It also exempts recipients of a Purple Heart from having to pay the fee. The money gained by this increase will be diverted to easing health care costs for veterans affected by exposure to Agent Orange.
It is assumed that new lender guidelines will be forthcoming prior to the start of the new year. Remember that any loans that start processing prior to January 1, 2020 will still be subject to current VA loan limits and funding fee schedules. Even with the slight increase in the funding fee, this change in the law is welcomed and will only benefit service members in getting into the house of their dreams.
As you can see, circumstances surrounding the VA Funding fee can be a little confusing. Our professionals at National VA Loans know all the ins and outs of the VA loan process. We’ll walk you through everything you need to know, step by step. For more information on the VA funding fee or if you have any other questions, just call us at 855-956-4040. Thanks so much for reading, and thank you again for all you do for our country.