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The VA Loan Funding Fee for Home Purchases

By: Grant Moon 09/30/12 01:21 pm

The VA Loan Funding Fee for Home Purchases

 

As you apply for a VA home loan, you’ll find a line item on your closing cost estimate labeled “Funding Fee.”  And unless this is not your first home loan rodeo, the Funding Fee is unique to VA loans.  What is that fee and what is it for?

The VA home loan is part of the original G.I. Bill put forth in 1944 and allows qualified veterans and service members to purchase a home with no money down.  Around the time this benefit was enacted, most home loans required a down payment of 25 percent or more, a true burden on the back of returning troops.  The VA home loan guarantees, to the lender that issues the loan, 25% of the entire mortgage should the loan ever go into default, as long as the lender approved the loan using accepted VA guidelines.

Lenders accepted that challenge and since then the VA home loan has proven to be one of the most popular benefits available to those who qualify and the program has been a success.  Despite the zero down feature of the VA home loan, the VA loan has consistently had the lowest default rate of any mortgage program in the current marketplace.  But this VA guaranty does not appear out of thin air; it’s supported by the Funding Fee.

The funding fee is expressed as a percentage of the loan and amounts to an insurance premium, paid to the VA that benefits the lender that issued the VA loan.  This fee can vary depending upon the nature of the loan being made.

For example, a veteran who served on active duty using a VA home loan for the first time and selecting a 30 year fixed rate mortgage with no money down would pay a funding fee of 2.15 percent of the amount borrowed.  If the amount borrowed is $100,000 then the funding fee will be equal to $2,150. The veteran has the option of paying for that fee out of pocket or rolling that fee in with the loan amount; the latter an option almost all borrowers select.

Under that same scenario but with a 10 percent down payment, making the loan amount $90,000, the funding fee is 1.50 percent, or $1,350.  If the veteran sells the first home then later buys another using the VA program, his funding fee jumps to 3.30 percent.

The funding fee variables include the amount down, subsequent use, purchase or refinance and service type.  Even though the funding fee can be as much as $3,300 on a $100,000 loan, the fee can be rolled into the loan.  This feature has been the backbone of the VA home loan program, and has helped make it become the most stable mortgage loan program offered today. Below is the breakdown for the VA loan funding fee variables:

Type of Veteran Down Payment First Time Use Subsequent Use for loans from 1/1/04 to 9/30/2011
Regular Military None5% or more (up to 10%)10%  or more

2.15%

1.50%

1.25%

   3.3%  *

1.50%

1.25%

Reserves/Guard None5% or more (up to 10%)10% or more

2.4%

1.75%

1.5%

   3.3%  *

1.75%

1.5%

Additionally, the funding fee can be waived for veterans that have a disability rating greater than 10% from the VA. This can be a substantial savings and a benefit that many vets don’t know about.

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