VA loans are built to minimize the financial impact on military members who qualify for the program. Credit and income requirements are generally more lenient than conventional loans and sellers are allowed to pay a sizable portion of closing costs and concessions. On top of that, the Veterans Administrations caps what veterans can pay in costs and fees.
But there’s one charge that military borrowers can’t escape — the VA Funding Fee.
The VA Funding Fee is a set fee applied to every purchase loan or refinance. The proceeds go directly to the VA and help cover losses on the few loans that go into default. In essence, the Funding Fee helps keep the VA Loan Guaranty program afloat. The fee changes slightly depending on the down payment amount, whether the borrower has a prior VA loan and the nature of the borrower’s service. There are exemptions for borrowers with service-connected disabilities and for qualifying surviving spouses. This is a closing cost that’s unavoidable for almost every VA borrower. You can’t negotiate or sweet talk your way out of paying it.
For home purchases, regular military members pay slightly lower Funding Fees than Reservists and National Guard members. Here’s a look at the fees on purchase loans for regular military:
|Down payment||Funding Fee (1st use)||Funding Fee (2nd use)|
|None||2.4 percent||3.3 percent|
|5-10 percent||1.75 percent||1.75 percent|
|10 and up||1.5 percent||1.5 percent|
Veterans aren’t required to come up with the Funding Fee from their own pocket. Borrowers can roll the cost into their loan amount, which adds a few dollars onto their monthly mortgage payment. For example, the 2.5 percent funding fee on a $200,000 mortgage comes out to $5,000. On a fixed-rate loan at 30 years and 6 percent, rolling in the funding fee adds an additional $30 per month.
Veterans refinancing their loans must also pay a Funding Fee. The VA has two major refinancing programs, the Interest Rate Reduction Refinancing Loan, better known as the VA Streamline, and a VA cash-out refinancing. For the no-frills Streamline, veterans are required to pay a 0.5 percent Funding Fee (that’s one-half of 1 percent). Veterans who want a cash-out refinance pay a little more than their Streamline counterparts. The current fee for a first refinance is 2.15 percent of the loan amount for regular military and 2.4 percent for Reserves and National Guard members. The fee jumps to 3.3 percent for both demographics for each subsequent refinance.
About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, from Lenderama and Bigger Pockets to the Huffington Post and Motley Fool. A former newspaper and magazine writer, he is also content director for a leading VA lender. Follow him on Google+.