Financing the VA Funding Fee
Besides requiring no money down and easier qualifying, VA home loans also have fewer closing costs compared to other loans. Well, actually the closing costs are similar to other loan programs it’s simply that you, the veteran, are not allowed to pay them. One closing cost that needs consideration is the single largest closing cost associated with the VA mortgage—the VA funding fee.
The VA funding fee is a part of the VA home loan guarantee. VA lenders like VA home loans due to the quality of the loan as well as the inherent loan guarantee provided by the VA. Should the VA loan ever go into default and the VA lender approved the VA loan using established VA lending guidelines, the VA lender is entitled to be compensated at a rate of 25 percent of the loan amount. The funding fee in this fashion can really be viewed as an insurance premium. The veteran pays for it and the lender is the recipient of the policy.
The VA funding fee amount is calculated as a percentage of the loan and can vary in policy amounts ranging from 2.15 to 3.15 for a purchase and 0.50 percent for a refinance. This can vary based upon the type and usage of the mortgage. On $300,000 sales price and zero down, first time use requires a 2.15 percent funding fee, or in this example, $6,450.
That’s a lot of money and partly offsets the benefit of a no down payment loan. However, the funding fee can be rolled into the loan amount for both a purchase and a refinance and does not have to be paid out of pocket. The veteran can certainly elect to pay the $6,450, but rarely is the VA funding fee paid for in cash.
