The opportunity to purchase a home with the VA loan program is a great benefit and has helped many veterans realize their dream of homeownership. However, there is one special fee added to VA loans that you should know about: the VA funding fee.
The funding fee is applied to all the VA home purchases and refinances to help the Veterans Administration cover any losses on the small amount of loans that default. The fee is based on your service, how much you put down on the home and if you’ve had a VA loan before, but there are a few groups of veterans who are exempt from paying the fee:
- Those who are entitled to receive disability compensation
- Surviving spouses of veterans who died in service or from a disability related to their service
There may be some cases where you would need to pay the fee initially until a pending disability claim is settled. If that is the case, you can get a refund retroactively. Contact your lender for more information.
VA Funding Fee Rates as of January 1, 2020
|Down Payment||% for 1st time use||% for subsequent use|
|from 0 to4.9%||2.3||3.6|
|from 5% to9.9%||1.65||1.65|
|10% or more||1.4||1.4|
While that percentage can come to a few thousand dollars, you don’t need to pay that out-of-pocket as it can be rolled into your closing costs. However, if you roll the fee into your loan, you will be paying a higher monthly payment and interest over the life of your loan, so that’s something you should consider. If you have the cash to pay it, that may be a better option. Plus, the funding fee is tax deductible*.
The fee is collected by lenders at closing and the money is then sent from the lender directly to the U.S. Department of Veterans Affairs.
*Ask your tax advisor for specific information regarding tax deductions.