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Quick Guide: VA funding fee

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Many active duty and former service members are encouraged to use VA loans to buy a house, but many people don’t understand why they have to pay a VA funding fee. In order to understand it, a person first has to understand the VA loan process.

VA loans are mortgages that are backed by the Veterans Administration. The actual loan is not administered by the VA, however, but instead the loans actually come from a bank. This means that the interest collected from the loans is not paid to the VA. In order to pay for the costs of the loan program, the VA charges a funding fee.

A VA funding fee is required by federal law. The VA funding fee is currently set to 2.15% on no down payment loans for a first-time homebuyer. The VA funding fee for second time homebuyers who do not make a down payment is 3.3%. The reason for the higher VA funding fee is that second time homebuyers have had a chance to build up their savings and equity. Therefore, they should pay a higher VA funding fee to take advantage of the program a second time.

It should be noted that in order to avoid paying the VA funding fee, a buyer is allowed to make a down payment that can negate all or part of the VA funding fee. When using a VA loan for purchase or construction, members of the regular military fall into the category of first time user or subsequent user. For first time users, no down payment requires a 2.15% VA funding fee, a down payment of at least 5 percent but less than 10 percent requires a 1.5% VA funding fee, and a down payment of 10% or more requires a 1.25% VA funding fee. For second-time homebuyers, no down payment requires a 3.3% VA funding fee, a down payment of at least 5 percent but less than 10 percent requires a 1.5% VA funding fee, and a down payment of 10% or more requires a 1.25% VA funding fee.

For members of the Reserves and National Guard, first time users with no down payment require a 2.4% VA funding fee, a down payment of at least 5 percent but less than 10 percent requires a 1.75% VA funding fee, and a down payment of 10% or more requires a 1.5% VA funding fee. For second time homebuyers who are members of the Reserves and National Guard, no down payment requires a 3.3% fee, down payment of at least 5 percent but less than 10 percent requires a 1.75% fee, and down payment of 10% or more requires a 1.5% fee.

Cash-out refinancing mortgages for military members require a 2.15% fee for first time users and a 3.3% fee for second time homebuyers. For the Reserves and National Guard, the requirement is a 2.4% fee for first time users and a 3.3% fee for subsequent users. With a down payment, a borrower should follow the guidelines on funding fees that are listed above. For interest rate reduction loans, the VA funding fee is .50% and it is 1.0% on manufactured home mortgages.

The following borrowers are usually exempt from paying a funding fee: veterans receiving VA compensation for service-connected disabilities, veterans who would be entitled to receive compensation for service-connected disabilities if they did not receive retirement pay, and surviving spouses of veterans who died in service or from service-connected disabilities. Of course, the VA makes the final decision on who is exempt.

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