Post from MilitaryByOwner
One of the first options military members consider for a home purchase is their right to apply for a VA home loan. Most real estate agents and mortgage lenders will, at minimum, recommend investigating a VA loan because it is an attractive option due to affordability. A down payment isn’t required, nor is the need for private mortgage insurance.
For first timers, and even those using their benefit for a second time, understanding the details of fees involved with accessing the loan is an overwhelming process. Amongst the fees a buyer will incur during the VA home loan process is one known as the funding fee. The funding fee is applied to every VA purchase and refinance loan, with only a few exceptions.
Details of the Funding Fee
In the simplest terms, the funding fee exists to offset costs that occur due to VA guaranteed loans that default. The fee also helps relieve U.S. taxpayers the full burden of backing the loans. The Department of Veterans Affairs receives all of the funding fees to assure future availability of VA loans to service members.
The funding fee is adjustable according to multiple factors, including the details of the military member’s service, if there is a down payment applied, and number of times the loan benefit has been used in the past. Active duty service members traditionally pay the lowest funding fees among their military peers, National Guardsmen, and Reservists.
Use this easy to understand example from Veterans United to compare what your funding fees might look like. “On a typical $200,000 loan, a Regular Military veteran using a VA loan for the first time would borrow an additional $4,300 to cover the funding fee.”
Funding Fees and VA Refinance Products
If the service member is currently in possession of a VA Loan, there are two refinance options available that require funding fees: the Interest Rate Reduction Refinance Loan (IRRRL) and the Cash-Out refinance. Each has their own function, and the funding fees vary tremendously due to the specific purposes of the loan.
- IRRRLs are offered to help VA homeowners lower their mortgage rates or to exit an adjustable rate loan. Unless exempt, all homeowners are required to pay 0.5% as a funding fee. The number of times the VA home loan benefit has been used is not a factor, nor are the details of the member’s service.
- The Cash-Out refinance fees are similar to a typical VA purchase, but the borrowers are not eligible to lower their funding fees by using equity or making a down payment.
Can the Fee Be Waived?
Yes. There are several official circumstances when the fee is waived. The VA also has the right to examine and research out-of-the-norm requests for funding fee exemptions.
The VA provides three scenarios typifying who is exempt from paying funding fees.
- Veteran receiving VA compensation for a service-connected disability, OR
- Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
- Surviving spouse of a Veteran who died in service or from a service-connected disability.
How Do I Pay the Funding Fee?
Part of the mortgage approval process is for the lender to verify the funding fee status. During the verification process, the Certificate of Eligibility sent from the VA determines if the funding fee is waived or paid.
The lender then collects the funding fee during the loan’s closing. Because the fee is likely thousands of dollars, most borrowers choose to finance the funding fee and roll it into the loan, but they can also pay cash or ask the seller to pay. Veterans using refinance options can either pay the funding fee upfront, or finance payments over the lifetime of the loan.
Purchasing a home with a VA loan is a time consuming and often misunderstood process for not only the borrowers, but real estate and mortgage professionals who do not have an abundance of experience working with the VA. It is highly recommended to research and ask for referrals for both providers.
Before diving into the VA loan process, read all of the free home buying resources MilitaryByOwner has created. With this knowledge, walking into a lender’s office is less intimidating. Also, having prepared questions on hand to ask your lender is significantly useful for time management in the office or on the phone.