When you're in the military, you or your spouse may qualify for a VA loan using the VA home loan guaranty benefit. With a VA loan there is $0 down payment option for veterans, service members and some military spouses. Despite $0 down payments, you will be required to pay funding fees (some exceptions exist). These fees are included in VA loans and VA refinancing options. Let's take a closer look at funding fees and how they apply to you.
Funding fees are one-time fees which are applied to every VA loan, purchase or refinance. Fees are based off of a percentage of the total loan amount (see graphic). These fees offset VA loans that go into default, help reduce taxpayer costs, and allow the VA to continue to offer VA home loan programs to military families. Fees can be financed into the monthly mortgage loan payment.
Funding fees increased in January 2020 as a result of the Blue Water Navy Vietnam Veterans Act of 2019. Due to recent changes, a slight increase (0.15-0.30%) in funding fees affects veterans and service members. National Guard and Reserve members will see a small decrease in their fees.
Although no down payment is required with a VA loan, you will be able to reduce the funding fee if you contribute a down payment. On a $250,000 first-time VA loan, without a down payment, a regular military veteran can expect to pay $5,750 for the funding fee. Most borrowers will opt to borrow the additional $5,750 and include it in their monthly mortgage payment.
Military receiving compensation for service-related disabilities, or any of the following, will be exempt from funding fees:
- Those receiving disability compensation as a result of service-related medical issues
- Those on active duty who provide a certificate or military orders which show the Purple Heart award
- Those who are entitled to receive compensation for a service-connected disability, if they receive retirement pay in lieu of compensation or active duty pay
- Those rated as eligible based on a pre-discharge exam or review
- Surviving spouses of one who died in service, from a service-related cause, or totally disabled and receiving DIC
During the loan process, your mortgage lender will verify the funding fee status. The Certificate of Eligibility (COE) will indicate whether or not you have to pay funding fees. You can apply for the COE online, through your lender or by mail. Information about the COE forms and proof of evidence of VA status are available on the VA government website.
Funding fees are due at closing. Your lender will have no control over your eligibility or the amount you will be required to pay, as this is up to the VA. If fees aren't financed into the loan, you may choose one of the following options:
- Ask the seller to pay the fees
- Cash payment
If you want to use VA funding to refinance, you will still pay funding fees but can take advantage of the following options:
- Interest Rate Reduction Refinance Loan (IRRRL)
- Cash-Out Refinance
If you're looking to lower your mortgage rate or get out of an ARM mortgage, IRRRL is the way to go. A 0.5% funding fee is charged no matter the service history of the VA homeowner or the number of times you've used the VA loan program. Using this option, funding fee rates don't increase for future VA loans.
As a veteran looking to refinance and pull cash from equity, you will want to utilize the cash-out refinance option. This is available to qualified veterans, whether they currently have a VA or non-VA loan. With this option, you cannot reduce your funding fee simply by making a down payment or using equity.
Talk to your lender about VA home loans, what you'll pay in funding fees or if you might be exempt. If you have to pay funding fees, they can be included in your monthly mortgage fees and paid over time to avoid having to pay a lump sum at closing. As a service member of the military, be aware of funding fees when purchasing or refinancing a home but don't let them hold you back from putting down roots and finding a place to call home.
Learn more about home finances in our guide: