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Mortgages backed by the U.S. Department of Veterans Affairs (VA) are often a great deal for veterans and active-duty military.
With VA-backed loans, you don’t have to pay for expensive private mortgage insurance, or PMI, even if you put less than 20% down on a home. And the eligibility and documentation requirements are often less stringent than a conventional mortgage. You’re also likely to get a more competitive rate than with a non-government-backed loan.
But there’s one fee that you’ll have to watch out for: the VA funding fee. Most people who get a VA-backed home loan will have to pay it — and it can make your new or refinanced mortgage more expensive than expected. Here’s what you should know about the VA funding fee.
The VA funding fee is a one-time payment charged for getting a new or refinanced mortgage backed by the VA. “Because this is a government-backed loan, it’s taking on the risk of non-repayment,” says Eric Bronnenkant, head of tax at Betterment, a robo-advisor and online bank. The funding fee provides some level of security for subsidizing a loan that doesn’t require mortgage insurance and may not have as stringent of an application and documentation process.
Depending on what type of loan you’re approved for, the fee can be paid upfront, paid with cash from your home’s equity (if you do a cash-out refinance), or rolled into your monthly payments.
The VA funding fee will vary based on the type of loan you choose. Some loans charge a tiered funding fee that varies based on your down payment or whether it’s your first time refinancing through the program.
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VA-Backed Purchase and Construction Loans
The funding fee will be lower if it’s your first time getting a VA-backed purchase (mortgage) or construction loan and lower if you make a larger down payment. For example, if you’re getting a VA-backed mortgage for the first time and plan to make a 7% down payment, then you would pay a fee that’s 1.65% of the loan amount.
VA-Backed Purchase and Construction Loans*
|Down Payment||VA Funding Fee|
|First Use||Less than 5%||2.3%|
|10% or more||1.4%|
|After First Use||Less than 5%||3.6%|
|5% or more||1.65%|
VA-Backed, Cash-Out Refinance
A VA-backed, cash-out refinance is when you replace an existing mortgage (conventional or VA-backed) and withdraw a portion of the home equity as cash. In this case, the VA funding fee for first use (meaning your first time refinancing the home) is 2.3% of the loan amount, then 3.6% after first use. The fee amount won’t change based on your down payment.
Interest Rate Reduction Refinance Loan (IRRRL)
With an IRRRL, which is a VA-backed refinance option, the VA funding fee is 0.5%. It doesn’t vary based on down payment or the number of times you’ve refinanced the home.
Most people will have to pay the VA funding fee, but there are some key exemptions if you match ONE of the following criteria:
- You receive VA compensation for a service-connected disability
- You’re eligible for VA compensation for a service-connected disability, but instead you receive retirement or active-duty pay
- You’re the surviving spouse of a veteran who died during service, died from a service-connected disability, or was totally disabled, AND you receive Dependency and Indemnity Compensation (DIC)
- You’re a service member with a proposed or memorandum rating, before the loan closing date, saying you’re eligible to get compensation because of a pre-discharge claim
- You’re an active-duty service member who was awarded the Purple Heart before or on the loan closing date
With an IRRRL or a purchase or construction loan, you can either pay the VA funding fee in full at closing or roll the fee into your monthly payments. With a cash-out refinance, you’re required to pay the fee upfront or use the cash you take out to cover it. “In general, it’s better to pay upfront because you’re not getting charged interest on that fee,” says Mark Reyes, CFP, financial advice expert at Albert, an automated money management and investing app.
The VA funding fee can be hefty, especially if you’re taking out a mortgage with less than 5% down. Comparing the interest rate (and your down payment, if applicable) with the VA funding fee and closing costs will be key, as you need to understand if the one-time fees are worth the potential savings.