VA Funding Fee & Exemptions: The Uncensored Truth

Unlike FHA or Conventional loans, the VA Home Loan does not require you to pay a monthly mortgage insurance premium (PMI). However, the program still incurs costs when loans default. To keep the system entirely self-sustaining without burdening American taxpayers, Congress instituted the one-time VA Funding Fee.

Financing the Fee

You have the option to pay the funding fee in cash at the closing table to lower your overall mortgage balance. However, the vast majority of Veterans choose to finance the fee by rolling it directly into their total loan amount. Even if financing the fee pushes your loan balance above the appraised value of the home, the VA allows it.

Hundreds of thousands of Veterans utilize the VA loan every year without paying a single dollar toward the funding fee. If you meet any of the strict criteria outlined by the Department of Veterans Affairs, the fee is completely waived.

The Complete Exemption List

• Veterans receiving VA compensation for a service-connected disability.
• Veterans who are entitled to receive VA compensation for a service-connected disability, but receive retirement pay or active duty pay instead.
• Active-duty service members who have been officially awarded the Purple Heart.
• Surviving spouses of Veterans who died in service or from a service-connected disability (who are using the Dependency and Indemnity Compensation benefit).

The Pre-Discharge Exception (Pending Ratings)

What happens if you are going through the medical discharge process but haven't received your official disability rating yet? If you have been rated by the VA as eligible to receive compensation as a result of a pre-discharge exam prior to closing on the home, the fee will be waived.

The Retroactive Refund: If you close on your home, pay the funding fee, and later receive a service-connected disability rating that is retroactively dated to a time prior to your loan closing, the VA will completely refund your funding fee!

If you are not exempt, your funding fee percentage is dictated by two factors: how many times you have used the VA loan, and how much money you are putting down.

First-Time Use vs. Subsequent Use

The VA penalizes borrowers who repeatedly use the 0% down program. If this is your first time using a VA loan, your base fee is 2.15%. But if you have previously used a VA loan (and are trying to buy a second home or have sold the first one), your base fee jumps to a hefty 3.30%.

The 5% Down Payment Strategy

You can drastically reduce the funding fee by putting "skin in the game." If you make a down payment of at least 5%, the funding fee plummets to 1.50%—regardless of whether it is your first time using the loan or your fifth time. If you put down 10% or more, the fee drops even further to 1.25%.