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VA Funding Fees: Everything You Need to Know
VA loans are special types of mortgages available to active service members, veterans and their families. These mortgages are administered through the United States Department of Veteran Affairs (VA). The aim of VA loans is to make purchasing a home easier for service members as there is no need for a down payment.
Since 1944, VA loans have helped over 22 million military members purchase homes. Since the government backs VA loans, the rates you pay are much better than that of a traditional loan. This means that military members can save significant costs on purchasing a home.
While VA loans don’t require mortgage insurance, a one-time VA loan funding fee is required instead. This VA funding fee can be paid either upfront or rolled into the mortgage.
VA loan fund fees explained
Most VA loans come with a VA funding fee attached. This fee goes directly into the Department of Veterans Affairs and helps back VA loans for future members. The fund helps to cover losses and maintain the loan guarantee program for future service member home buyers.
The VA loan funding fee exists in place of traditional mortgage insurance. With no private mortgage insurance to pay out, military members can save hundreds of dollars a month, making VA loans a no-brainer for most military members over traditional mortgages and loans.
The VA loan funding fee can be paid at the start of your VA loan or rolled out into the mortgage itself. The latter could make it more manageable to pay off. The fees can also differ depending on whether this is your first home or whether you are a repeat buyer.
[ Read: Best VA Loans ]
Typical VA loan fund fees
The VA loan fund fee varies in cost depending on the mortgage lender and your situation. The fee for first-time buyers is usually 2.3% of your loan cost if you have no down payment. If you are a repeat home buyer, then these fees are usually 3.6%. However, the VA fee can be less if you have a down payment, which can help you save some money.
If you want to save some money on your VA loan funding fee, then a down payment of 5.0% of the house value can decrease the cost by 0.65% if you are a first-time buyer. And if you put down at least 10%, you could see a decrease by up to 0.90% on your home payment.
Take a look at the VA funding fee chart below for an idea of the VA loan funding fee amounts for 2020:
|First-time buyer||Less than 5%||2.3%|
|5% or more||1.65%|
|10% or more||1.4%|
|Repeat buyer||Less than 5%||3.6%|
|5% or more||1.65%|
|10% or more||1.4%|
VA loan fees vs. other loan fees
While other types of mortgages don’t have funding fees, they do have other costs in the form of mortgage insurance when your down payment is less than 20% of the home’s purchase price. How much you pay varies based on a number of factors, including the type of mortgage you choose.
With a conventional home loan, you can expect to pay anywhere between 0.25% to 2% per year for private mortgage insurance (PMI). The rate you pay depends on a few different criteria, including your credit score and your down payment amount. Once your loan balance reaches a certain threshold (usually when you reach about 20% to 22% in home equity), your PMI drops off.
FHA loans work a little differently. They charge a mortgage insurance premium, both at the time of closing and on an annual basis. The upfront mortgage insurance premium is 1.75% of your loan. The amount you pay annually is based on the length of your mortgage and the size of your down payment. It varies anywhere between 0.45% and 1.05%.
[ Next: VA Loans vs. Conventional Loans ]
FHA loans are also unique in how long MIP lasts. If your down payment is 10% or more, the MIP requirement lasts for 11 years. If your down payment is less than 10% of the purchase price, your MIP lasts for the life of the loan. The only way to get rid of it is to pay it off or refinance into a new type of mortgage loan.
When evaluating any mortgage options, be sure to compare the full offer, including interest rates and various fees.
How to get a VA funding fee exemption
Not every service member will have to pay the VA funding fee on top of their loan. Those who qualify for the VA Funding Fee exemption include:
- Veterans who receive compensation for service-related disabilities
- Veterans who are not yet receiving compensation and are still on active duty
- Those who receive disability compensation if they did not receive retirement pay
- Veterans who are eligible to receive compensation based on a pre-discharge exam
- Purple Heart recipients
- Surviving spouses who are eligible for a VA loan
How to avoid paying VA funding fees upfront
The great thing about a VA loan is that your out-of-pocket expenses can be quite minimal. There is no down payment required, which is usually the main barrier to buying a house. However, if you can put a down payment on the home, this is recommended because you can save money on the VA loan funding fee.
The VA loan funding fee also does not need to be paid upfront. Instead, you can choose to pay the VA loan funding fee by including it in your mortgage costs. This means you will be able to pay it off over time instead. This option ideal for those who would rather avoid lump-sum payments when they are buying a home. However, attaching the fee to your mortgage means that your loan’s monthly cost will be slightly higher. This is something you will need to weigh up before you agree to a VA loan.
If you prefer to get the VA loan funding fee out of the way, you can also choose to pay the full fee upfront at the time of closing. This method will ensure your monthly mortgage costs are lower because you won’t need to continue paying the fee.
Additional VA loan closing costs
There is a chance that you will need to pay some closing costs that aren’t included in the VA mortgage calculation. This could include origination fees or fees for credit reports or other services. This origination fee is limited, though, so it won’t be more than 1% of the loan amount.
However, the good news is that there are some fees you won’t have to pay. The Department of Veterans Affairs ensures you won’t have to pay certain additional charges. These include a lender’s attorney service fee, settlement charges or mortgage broker commissions. This is one of the many benefits of getting a VA loan for your property purchase.
- Closing costs: Buyer closing costs may include a number of expenses, such as a loan origination fee, appraisal fee, title insurance, homeowners insurance, property taxes and escrow fees.
- Down payment: A down payment is the amount of money you pay toward a home’s purchase price at closing. Most lenders require a minimum of 3%, but some programs, including VA loans, allow for a 0% down payment.
- Interest rate: This is a percentage charged on the loan that is paid to the lender in exchange for the loan. Your rate depends on your credit score and other factors. It can be fixed or variable, depending on your loan terms.
- Loan amount: The loan amount is the money the borrower borrows from the lender to purchase a home. The larger your down payment, the lower your loan amount will be.
- Refinance: A refinance is a new mortgage loan that pays off the initial mortgage and has completely new terms. Comparing refinance rates on a VA loan could save you money, especially if your credit has improved.