If you are a veteran in the new home market, chances are you are considering a loan from the United States Department of Veterans Affairs (VA). And for good reason: A VA loan can help you finance the purchase of a home for as little as $ 0 down payment, even if your credit isn’t in good shape, without having to pay mortgage insurance.
However, that doesn’t mean that this option doesn’t cost anything. If you choose to borrow a VA home loan, you will need to pay VA financing fees. The amount of these fees will depend on a few factors, including the amount of your down payment.
Before you go too far in the mortgage process, learn more about the cost of financing the VA and how you should budget for this potential cost of the loan.
Related: Best VA Mortgage Lenders
What are the VA financing fees?
VA loans are issued by private banks, but are partially backed by the Department of Veterans Affairs. This means that if a borrower fails to repay the loan, the federal government insures a portion of these funds so that the issuing lender does not pay the entire remaining balance.
VA loans are also reusable, which means you can use your entire VA entitlement – the maximum amount the Veterans Administration will pay your lender if you default on your mortgage – over and over again as long as you pay off the loan every time. This right or guarantee reduces the risk for the lender to approve a loan for a borrower who may have no down payment and a lower than average credit rating.
In order to support this loan program and ensure its sustainability, VA loans require financing fees. This is a one-time charge that you must pay when closing a VA loan that is used to buy, build, improve, or repair a home, or when refinancing an existing VA mortgage, unless you are meet certain conditions.
How Much is the VA Loan Funding Fee?
The cost of financing VA loans fluctuate over time. Prior to 2020, the same fees were in effect from 2011 to 2019. The 2020 funding fees will be in effect until January 1, 2022. Then they will be reviewed.
The amount you are charged for the VA financing fee depends on how much you invest in a advance payment, as well as whether or not you’ve used a VA loan before. If you have used all of your AV rights in the past, future uses are considered “subsequent”.
Typically, the VA financing fees aren’t huge, but you can reduce the amount you have to pay by making a larger down payment.
First-time VA mortgage borrowers who deposit less than 5% are charged a fee of 2.30% of the total loan amount. Subsequent borrowers who deposit less than 5% are charged 3.60%. First-time borrowers and subsequent borrowers who deposit at least 5% but less than 10% pay a fee of 1.65%. Both pay a fee of 1.40% if they deposit 10% or more.
Say, for example, you’re a first-time VA loan borrower who doesn’t put money on a $ 250,000 loan. You can expect to pay a fee of $ 5,750 (2.30%). If you deposit 10% ($ 25,000) instead, you will be charged a fee of $ 3,150 (1.40%) on the remaining $ 225,000.
Keep in mind that these fees only apply to purchase and construction loans. If you do a cash refinancing of an existing VA mortgage, first-time borrowers pay a financing fee of 2.3%, and subsequent borrowers pay 3.6%.
However, these higher refinancing fees do not apply. Refinancing VA Streamline (also known as Interest Rate Reduction Refinance Loans, or IRRRLs). This program allows new borrowers and subsequent borrowers to replace an existing VA loan with a new VA loan that charges a lower interest rate, and the fee is only 0.50%.
VA Funding Fee Exemptions
Not all VA borrowers are required to pay finance charges. As of 2021, you are exempt from fees if you are:
- Receive compensation for a service-related disability
- You are entitled to compensation for a service-related disability, but instead receive a retirement or active service pension
- A service member with a proposed note or memo, before the loan closing date, stating that you are eligible for compensation due to a pre-release disability claim
- An active duty member who received a Purple Heart
- A surviving spouse of a veteran who died in service or from a service-related disability, or who was totally disabled, and you are receiving dependency and indemnity benefits
It is possible to obtain reimbursement of VA financing costs if you later receive VA compensation for a service-related disability. The effective date of this compensation must be retroactive before the closing date of your loan. For example, if you had an outstanding claim when you guaranteed your VA mortgage that was approved after the loan was closed, you are probably eligible for a repayment.
If you are unsure if you qualify for the VA Funding Fee Exemption, you can check your VA loan. Certificate of eligibility (COE). This document will indicate whether you are exempt or not. If you don’t have a COE, you can apply for one on the VA loan website.
How to Pay the VA Funding Fee
VA finance charges are due at the time of loan closing. You can pay for it in different ways.
First, you can choose to pay the full fee up front as part of your closing costs. This means that you must have cash on hand at the time of closing. This option is the cheapest in the long run, although it is not always possible.
If you are not able to find that much cash at closing, you also have the option of deferring charges on your loan. This might be the most convenient option, but it also means you’ll pay more over time as the fees build into your principal balance and earn interest.
Say, for example, you borrow a 30-year VA $ 250,000 mortgage at an interest rate of 3.5%. Your monthly payment would be $ 1,122. If you were to pay a 2.3% VA finance charge, that would be $ 5,750 payable on closing.
However, if you included that $ 5,750 in your loan balance (for a grand total of $ 255,750 borrowed), your monthly payments would increase to $ 1,148 and you would end up paying $ 3,545 in additional interest over the life of your loan.
Also keep in mind that the VA loan financing fee is not the only cost associated with your mortgage in addition to the principal and interest. You may also need to pay other closing costs, such as lender fees, appraisal fees, points and property taxes. It’s important to consider the full cost of your mortgage – not just finance costs – when considering how much to borrow and how to handle the upfront costs.
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