Your VA Funding Fee: Calculate and Save

For many veterans and military service members, the VA loan program makes the dream of owning a home possible. This government-backed mortgage option offers competitive interest rates and flexible terms, making it an attractive choice for those who have served our country.

However, along with the various benefits of a VA loan comes a funding fee that borrowers must pay. While this fee can add to the upfront costs of buying a home, understanding its purpose and how it is calculated is crucial for veterans looking to navigate the complexities of the home-buying process.

This article will explore the VA loan funding fee, why it exists, and how it can impact your overall mortgage experience.

What is the VA Funding Fee?

The VA funding fee is upfront for borrowers who utilize a VA home loan. It is a percentage of the loan paid at closing and goes directly to the Veterans Affairs Department. The fee varies between 1.4% and 3.6% depending on the details of the loan and the borrower.

The funding fee serves two primary purposes:

It helps fund the VA home loan program and covers any losses the VA incurs. Since VA loans require no down payment and have lenient credit standards, the funding fee helps mitigate the VA's risk.
It encourages borrowers to make a down payment if possible. The funding fee is lower when a down payment is made, so borrowers are incentivized to put some money down if they can.

The fee may be partially or fully financed into the loan amount, so borrowers rarely have to pay it out of pocket at closing. However, it increases the loan's total cost over time through a higher principal balance.

Who Has to Pay the Funding Fee?

The VA funding fee applies to all purchase and cash-out refinance VA loans. Borrowers cannot avoid it unless they qualify for an exemption.

Understanding VA Funding Fee Exemptions

When obtaining a VA home loan, one crucial factor to consider is the VA funding fee, which is typically required to be paid upfront. However, exploring the possibility of a funding fee exemption is essential, mainly if you are a VA borrower with a disability rating.

The VA funding fee exemption can significantly reduce your upfront costs when using a VA loan to purchase a home or refinance an existing mortgage. To calculate your potential savings, you can use a VA loan calculator and estimate your monthly mortgage payments, factoring in the exemption.

VA borrowers eligible for this exemption should speak with their loan officer to ensure they receive the benefits they're entitled to, as the fee amount varies depending on the type of loan, percentage of the loan amount, and other factors.

The most common exemptions include:

You may not have to pay the funding fee if any of the following apply:

You're a service member on active duty who provides evidence of having received the Purple Heart before or on the loan closing date.
You're eligible to receive VA compensation for a service-connected disability, but you're receiving retirement or active-duty pay instead or
You're receiving Dependency and Indemnity Compensation (DIC) as the surviving spouse of a Veteran, or
You're receiving VA compensation for a service-connected disability, or
You're a service member who received a proposed memorandum rating before the loan closing date that says you're eligible for compensation because of a pre-discharge claim.

Veterans who receive non-service-related VA pension benefits do not qualify for an exemption. Exemptions only apply to veterans receiving compensation for disabilities incurred or aggravated during active duty.

VA Funding Fee Rates

Two main factors determine an individual's VA funding fee rate:

Down payment amount
Type of military service

Here are the current VA funding fee rates for 2023:

Down Payment Rate for First-Time Use:

	If your down payment is…	Your VA funding fee will be…
First use	Less than 5%	2.15%
	5% or more	1.5%
	10% or more	1.25%

Down Payment Rate for Subsequent Use:

	If your down payment is…	Your VA funding fee will be…
After first use	Less than 5%	3.3%
	5% or more	1.5%
	10% or more	1.25%

The first-time use" rates apply to borrowers who have never used their VA loan benefit before. Lower "subsequent use" rates apply if the borrower has previously had a VA home loan.

2023 VA Funding Fee Chart for Cash-Out Refinance Loans

First Use	After First Use
2.15%	3.30%

Calculating the VA Funding Fee

Once you know the rate, Figuring out your VA funding fee is simple. Just follow these steps:

Determine your VA funding fee rate based on your down payment and military status.
Multiply this rate by your total loan amount. Do not deduct the funding fee itself from the total loan amount.
The result is your total VA funding fee. It will likely be rounded to the nearest whole dollar amount.

For example, let's say a veteran is buying a $300,000 home with 0% down. Their funding fee rate would be 2.3%. Multiplying this by the $300,000 loan amount equals a funding fee of $6,900.

How to Calculate VA Funding Fee

The VA funding fee is calculated as a percentage of the total loan amount. To estimate your cost:

1. Determine your loan amount.
For example, if you borrow $300,000,

2. Identify the applicable VA funding fee percentage.
For example, 2.15% for first-time use with less than 5% down

3. Multiply the percentage by the loan amount.
2.15% * $300,000 = $6,450 funding fee

This provides an estimate of the fee that will be collected at closing.

Example VA Funding Fee Calculation

Let's look at a complete example:

VA loan amount: $300,000
First time using the VA loan benefit
2% down payment ($6,000)
Borrower is on active duty

Based on these specifics:

Fee percentage: 2.15% (first-time use, <5% down)
2.15% of ($300,000 less $6,000) $294,000 = $6,321 VA funding fee

With a $294,000 loan and a 2.15% rate, this borrower would pay a $6,321 VA funding fee at closing.

Down payment amount, loan term, interest rate, and other factors do not directly impact the funding fee calculation; only the loan amount and VA fee percentage do.

How the VA Funding Fee is Paid

Unlike closing costs or prepaid interest, which get rolled into the loan amount, the VA funding fee can be financed. There are three ways to pay it:

1. Cash at closing

The borrower pays the total cost from their funds at closing.

2. VA financing

The price is rolled into the loan principal.

3. Seller Paid

VA financing helps reduce the cash needed at closing but increases the loan amount and total interest paid over the long run.

Tips for Minimizing the Funding Fee

Since the VA funding fee is a percentage of your total loan, the best way to reduce it is to lower your loan amount. Here are some tips:

Make a down payment if possible. Even 5% down significantly reduces the fee.
Look for closing cost assistance programs in your state. These can provide grants to cover the funding fee.
Shop for the lowest interest rate. A lower rate decreases your monthly payments and overall loan costs.
Buy a lower-priced home if you can qualify for the loan amount. The fee is based on the total loan amount.
Refinance once you have 20% equity. The funding fee does not apply to standard refinances.
Request a lower loan amount. Lenders will approve you for the maximum you qualify, but you can request less.

Conclusion

The VA funding fee enables veterans, service members, and their families to attain homeownership with no money down. While the price adds costs, the long-term financial benefits and pride of owning your home often outweigh it. Understanding the fee, your exact rate and ways to minimize it will lead to the best VA loan experience.

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Calculate the VA funding fee