The U.S. military offers significant benefits to its members, particularly through the VA home loan program. This program provides veterans, active service members, and their surviving family members access to low-cost home loans that do not require a down payment or mortgage insurance. This can greatly reduce the barrier to homeownership, allowing eligible borrowers to secure financing to buy or build a home without incurring many common upfront costs associated with traditional loans. However, it is important for borrowers to understand that while VA loans are advantageous, they do come with a unique fee structure—the VA funding fee—which is intended to mitigate the costs incurred by the U.S. Department of Veterans Affairs in guaranteeing these loans against potential borrower defaults.
The VA loan program operates with backing from the Department of Veterans Affairs, ensuring a portion of the loans is guaranteed. This guarantee is critical as it allows lenders to offer more favorable terms such as lower interest rates and relaxed borrowing criteria. Importantly, the backing reduces the lender’s risk, but it may also place a financial burden on taxpayers, prompting the VA to charge borrowers a one-time funding fee. Depending on various factors—including the type of loan, the size of any down payment, and whether or not the borrower has utilized a VA loan before—the funding fee can range from 0.5% to 3.3% of the total loan amount.
Eligible borrowers have multiple options within the VA loan program, which encompasses various types of home loans tailored to different needs. Among the available loans are those for purchasing or constructing a home, financing manufactured homes, cash-out refinancing loans, and interest rate reduction refinancing loans (IRRRLs). Each category of loan has its own specific funding fee structure. For instance, the 2023 funding fee rates required for purchase and construction loans are primarily influenced by whether it is the borrower’s first VA loan and the amount of any down payment.
Consider a scenario where a first-time borrower is looking to purchase a $250,000 home without making a down payment; they would incur a VA funding fee of approximately 2.15%, which amounts to $5,375. In the case of refinancing, particularly for cash-out refinancing, the VA funding fee is solely dependent on whether the borrower is accessing VA loans for the first time since there is no down payment involved. It is also worth noting that the VA has established a flat funding fee for those purchasing manufactured homes or refinancing existing loans, which is unaffected by variables such as down payment size or prior loan usage.
To pay the VA funding fee, borrowers are presented with two choices: they can settle the fee in full at the time of closing or add the fee to the overall loan amount. Adding the funding fee to the mortgage may alleviate immediate closing costs; however, it results in higher long-term interest payments. Although most VA loan borrowers are required to pay this fee, there are exemptions in place for certain groups, including veterans receiving compensation for service-related disabilities, surviving spouses of veterans, and active-duty members who have been awarded a Purple Heart.
Furthermore, some borrowers may qualify for a refund of the VA funding fee under specific circumstances, particularly if they have been awarded compensation for a service-related disability retroactively effective prior to the closing of their VA loan. In 2024, the funding fee percentages are scheduled to adjust slightly, reflecting a range of 1.25% to 2.15% for first-time borrowers depending on their down payment and a higher range of 1.25% to 3.30% for repeat users. Ultimately, the VA funding fee serves an essential role in the financial framework underpinning the VA loan program, creating an avenue for low-cost financing for veterans while helping offset the government’s risk in guaranteeing these loans.