Getting a VA home loan is often a great deal for military members and veterans.
Unlike conventional loans that can require a down payment ranging from 5 percent to 20 percent, VA loans can be obtained with no money down, and they have more lenient credit requirements, too.
But one slight drawback of securing a VA loan is that borrowers often have to pay a fee, known as the “VA Funding Fee.”
Here are five facts you need to know about the VA Funding Fee and how it works:
No. 1: What is the VA Funding Fee?
The VA Funding Fee is an upfront, one-time fee paid to the Department of Veterans Affairs for a VA home loan.
While the VA doesn’t make home loans, it does insure them. Private lenders issue VA loans, not the government.
No. 2: How much is the VA Funding Fee?
The VA Funding Fee isn’t a one-size-fits-all charge for all borrowers.
It ranges from a low of 1.25 percent to as high as 3.3 percent of the loan amount, based on a host of factors -- including the loan size, the down payment amount (if any), whether or not a borrower has had a previous VA loan, and the borrower’s military category.
With the most common VA loan -- the no-money-down option -- the VA Funding Fee for regular military is 2.15 percent and the fee is 2.4 percent for those in the Reserves or National Guard.
Here is the VA’s Funding Fee table:
No. 3: Who has to pay the VA Funding Fee?
Most active-duty military and veterans who qualify for VA mortgages will need to pay the VA Funding Fee.
Reservists and National Guard members are eligible, as well as spouses of service members who died while on active duty or as a result of a service-connected disability.
4. Who doesn’t have to pay the VA Funding Fee?
Fortunately, not everyone who qualifies for a VA loan has to pay the upfront VA Funding Fee.
“If the veteran has any percentage of service-related disability, they are not required to pay the fee. It is completely waived,” says Bentley Bowden, an Associate Loan Officer at The Davidson Group in Garland, Texas.
The VA’s website provides further details on related circumstances under which a borrower can be exempted from paying the VA Funding Fee. These circumstances include:
- Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
- Surviving spouse of a Veteran who died in service or from a service-connected disability
5. Why you have to pay the Funding Fee
Even though VA loans have very low default rates, the VA Funding Fee is officially assessed as a way to cover potential losses in the event borrowers default on their mortgages.
“Any kind of upfront fee on a government home loan is effectively a de facto down payment,” says Bowden. So he sees the fee as the government’s way of ensuring that veterans have at least some skin in the game when they seek home financing.
No matter how you view it, anything that makes buying or maintaining a home more costly can put a damper on homeownership. In fact, according to the 2015 Military Lifestyle Family Survey, conducted by Blue Star Military Families, a growing number of service members and veterans face financial worries, including concerns over high housing costs.
But even though the VA Funding Fee can make purchasing or refinancing a home slightly more expensive, the benefits of VA loans can often outweigh the initial costs, making a VA home loan worth considering.
Service members and veterans should have a Certificate of Eligibility (COE), which verifies to lenders that you are eligible for a VA loan. This COE will usually indicate disability status and whether you should be exempt from paying a VA Funding Fee. If you don’t currently have one, apply for a COE online at www.ebenefits.va.gov or using VA Form 26-1880.