VA Loan Funding Fees Explained

Anytime you seek a mortgage loan, you will have to pay a funding fee at closing, and a VA loan is no different. The main difference is the purpose of this fee. The whole purpose of the VA loan funding fee, unlike a private loan funding fee, is not to generate profit for the lender. The fee is aimed at covering the actual cost of the loan program, reducing the burden it presents to tax payers.

Standard Funding Fee

The funding fee on a VA loan is a standard percentage across the board for all borrowers, regardless of the size of the mortgage loan. With a traditional lender, the rate will vary based on the size of the loan. The funding fee hovered around 2.15 percent in the late 2000s. This fee is higher the second time a veteran uses the VA home loan program, but it only goes up to 3.3 percent at that point. The second fee is not assessed if the veteran places a down payment on the home. In both a first and second home loan, a down payment is not actually required. However, the second time a borrower uses the benefit, they had the chance to gain equity off the first mortgage loan. If the borrower still does not have a down payment, the fee to fund the loan goes up.

Construction Loan Funding Fee

The VA home loan program offers loan guarantees on standard mortgages as well as construction loans. These construction loans are essentially home equity loans backed by the VA. They can cover repairs to the home, improvements on the home, or even the cost of building a home on a property under certain scenarios. The construction loan fee is the same as the home loan funding fee. To completely understand the fee schedule when you are applying, ask your lender for a breakdown of the fees. You will get a lower fee if you place a larger down payment. For example, on a VA construction loan in 2010, a borrower putting more than 10 percent down on a construction loan will receive a fee rate of 1.25 percent.

Exceptions

There are some military service areas that receive a slightly modified fee schedule. Members of the Reserves or National Guard have a slightly higher fee, starting around 2.4 percent for a home or construction loan with no down payment. The length of military service will not change the terms of the fee, but it may change the size of the guaranty a borrower is eligible for. To find out the size of the guaranty you qualify for, you must get a certificate of eligibility for the loan from the Department of Veterans Affairs.

Exemptions

There are some groups exempt from the fee. Those groups include:

  • Any veteran receiving disability benefits from the VA based on service-connected disabilities.
  • Those who would qualify for the disability benefits if they did not receive retirement pay.
  • Surviving spouses of those who died in service-connected disabilities. This only applies to spouses, not children of the deceased.
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