The VA home loan program offers unmatched advantages to veterans and active-duty service members—most notably, no down payment and no private mortgage insurance (PMI). However, one cost that often raises questions is the VA funding fee. Understanding what this fee covers, how it’s calculated, and when it can be waived is essential for planning your total mortgage costs and managing veteran closing expenses.
This guide breaks down the purpose of the VA funding fee, how it affects your home loan, and what options exist to minimize or eliminate it. By the end, you’ll have a clear understanding of how this one-time charge fits into the broader benefits of VA-backed financing.
What Is the VA Funding Fee?
The VA funding fee is a one-time payment required on most VA-backed home loans. It’s designed to help offset the program’s cost to taxpayers and keep the benefit sustainable for future generations of service members. The U.S. Department of Veterans Affairs guarantees a portion of each VA loan, and the funding fee contributes to that guarantee fund.
Unlike recurring charges such as mortgage insurance, the VA funding fee is paid only once per loan. Borrowers can choose to pay it upfront at closing or roll it into their total loan amount. The amount you pay depends on several factors, including your down payment size, service history, and whether it’s your first or subsequent use of the VA benefit.
Why the Funding Fee Exists
1. Sustainability: The fee helps maintain the VA loan program without requiring additional taxpayer funding.
2. Accessibility: By offsetting administrative costs, the VA can continue offering no-down-payment loans to millions of veterans.
3. Fairness: Those who use the benefit contribute to its long-term stability while still enjoying lower mortgage costs overall compared to conventional loans.
How the VA Funding Fee Is Calculated
The VA funding fee varies depending on the type of loan, the size of your down payment, and how many times you’ve used your VA entitlement. The most common funding fee applies to purchase and refinance loans, but rates differ for specific loan categories such as the VA Interest Rate Reduction Refinance Loan (IRRRL) or Native American Direct Loans.
The VA updates fee percentages periodically, so it’s important to verify the current rates when applying for a mortgage. Below is a general overview based on recent VA guidelines.
VA Funding Fee Percentages (Approximate)
First-Time Use – Purchase Loan:
- 0% Down Payment: 2.15% of the loan amount
- 5% to 9.99% Down Payment: 1.5%
- 10% or More Down Payment: 1.25%
Subsequent Use – Purchase Loan:
- 0% Down Payment: 3.3%
- 5% to 9.99% Down Payment: 1.5%
- 10% or More Down Payment: 1.25%
VA IRRRL (Streamline Refinance): 0.5% flat fee
Cash-Out Refinance: 2.15% for first-time use; 3.3% for subsequent use
For a $300,000 home with no down payment, a first-time borrower would owe a $6,450 funding fee (2.15%), either paid at closing or financed into the mortgage balance.
When the VA Funding Fee Can Be Waived
Not every veteran or service member is required to pay the VA funding fee. Certain individuals qualify for an exemption based on disability status or service-related benefits. Waivers can substantially lower veteran closing expenses and make homeownership even more affordable.
Exemption Criteria
1. Veterans Receiving Disability Compensation: Those receiving VA disability benefits for service-connected conditions are exempt from paying the funding fee.
2. Surviving Spouses: Eligible surviving spouses of veterans who died in service or from service-connected disabilities qualify for the exemption.
3. Active-Duty Members with Pre-Discharge Rating: Servicemembers awaiting a disability rating decision before closing may qualify for reimbursement after the loan closes.
Borrowers unsure about their eligibility can confirm exemption status through their Certificate of Eligibility (COE), which lists whether a funding fee is required.
How to Pay the VA Funding Fee
The VA offers flexibility in how the funding fee is paid. Borrowers can choose between paying the fee upfront at closing or adding it to their loan balance. While financing the fee increases total loan costs slightly, it allows buyers to avoid paying out of pocket during the home purchase.
Payment Options
1. Pay Upfront: Ideal for buyers with available savings who want to minimize long-term interest costs.
2. Finance into the Loan: Adds the funding fee to your mortgage balance, spreading the cost across monthly payments.
3. Split the Payment: Some lenders allow partial upfront payment with the remainder financed into the loan.
Whichever option you choose, it’s wise to factor the funding fee into your overall mortgage costs to avoid surprises at closing.
Comparing the VA Funding Fee to Other Loan Costs
Even with the funding fee, VA loans remain one of the most affordable financing options available. Conventional loans often require a 3%–20% down payment plus private mortgage insurance (PMI) until equity reaches 20%. FHA loans, while offering low down payments, come with ongoing mortgage insurance premiums that can cost thousands over time.
In contrast, the one-time VA funding fee is typically much lower than the combined insurance and closing costs of alternative loan programs. For most veterans, this fee is a small price for lifetime access to affordable homeownership.
Cost Comparison Example
On a $300,000 mortgage:
- VA Loan: 2.15% funding fee ($6,450) – no PMI or ongoing insurance
- FHA Loan: 1.75% upfront mortgage insurance premium ($5,250) + annual premiums for the life of the loan
- Conventional Loan: 5% down payment ($15,000) + PMI until 20% equity is reached
In nearly every case, the VA program results in lower total mortgage costs and fewer recurring fees for qualified borrowers.
Tips for Reducing Closing Expenses
While the funding fee is a major component of veteran closing expenses, other costs—such as appraisal fees, title insurance, and prepaid taxes—can also add up. Veterans can save money by comparing lenders and negotiating with sellers or builders for closing cost assistance.
Smart Savings Strategies
1. Check for Lender Credits: Some lenders offer discounts or credits that offset part of the funding fee or other closing costs.
2. Consider a Down Payment: Making a 5%–10% down payment can reduce your funding fee percentage.
3. Request Seller Concessions: VA rules allow sellers to contribute up to 4% of the purchase price toward closing expenses.
4. Use State or Local Veteran Programs: Some states provide grants or reimbursements for qualified buyers to lower upfront costs.
Key Takeaway
The VA funding fee is a one-time charge that helps sustain the VA loan program while keeping it affordable for future generations. Although it adds to initial veteran closing expenses, it remains far less costly than mortgage insurance or large down payments required by other loan types. By understanding how the fee works—and exploring available exemptions—veterans can make the most of their mortgage costs and enjoy the lasting benefits of VA-backed homeownership.
