The VA has an extensive set of guidelines that lenders must follow in order for the loan to be VA-eligible. This eligibility allows a VA lender to sell the loan in the secondary market, replenishing reserves in order to make more loans. While most today understand that the VA doesn’t approve the loan directly but provides VA lenders with proper guidance. Doing so means the loan receives the VA guarantee. If the loan ever goes into default, the lender is eligible to receive 25% of the loan amount as compensation.
This compensation is financed by the funding fee which can vary based upon the nature of the loan. For first time buyers, the fee is 2.15% of the loan amount. With a $300,000 purchase, that amounts to $6,450. That’s a lot but it’s also the only closing cost that may be rolled into the loan amount when buying a home and increases the amount borrowed. While convenient, over the life of a 30 year loan that $6,450 turns into more than $11,000. Granted, few loans last that long but still it’s something veterans need to be aware of.
However, if you’ve received a disability rating of 10% or more, the funding fee requirement is waived entirely and for veterans who receive disability pay as the result of a final discharge exam or currently receiving disability pay. It’s up to you and your lender to document the disability rating. If the disability claim is still pending, the waiver won’t be issued. If you use your VA home loan benefit and finance the funding fee or pay for it out of pocket and later you receive your disability rating of 10% or more and the VA makes the disability rating retroactive to the day you bought the property, you may be able to have the funding fee reimbursed to you if you paid cash or if you financed the funding fee the balance will go toward reducing your principal balance, effectively eliminating the fee altogether.