VA Funding Fee: What It Is — and What It Is Not

The VA funding fee is a one-time charge that supports the VA home loan program. It is not mortgage insurance and it is not a lender fee. I get asked about it on nearly every VA loan, so here’s how it actually works.

What is the VA funding fee?

It’s a charge paid when the loan closes, and it helps keep the VA loan program running. Conventional loans charge private mortgage insurance every month. A VA loan doesn’t. The funding fee is the VA’s version of that cost, paid once. In my experience it can generally be added to the loan amount instead of paid in cash at closing, though I confirm that against the loan type.

How much is the funding fee?

It depends on your service, any earlier use of the benefit, the type of loan, and how much you put down. VA publishes the current percentage charts on its website for loans closed on or after January 1, 2020, and it says the percentage for second-time users who make no down payment is slightly higher. National Guard and Reserve veterans also pay a slightly higher percentage, according to VA. I always pull the current chart for your exact situation, because the percentages are the part I won’t guess at. You can find them on VA’s funding fee page (opens in a new tab).

Here’s the math if the fee is financed. This is a hypothetical to show the effect, not the actual fee. Every 1 percentage point of funding fee on a $400,000 loan is $4,000. If that’s added to the loan, you also pay interest on it for as long as you hold the loan.

Who doesn’t pay the funding fee?

According to VA, you don’t pay it if you are:

• a veteran receiving VA compensation for a service-connected disability,
• a veteran entitled to that compensation who receives retirement or active duty pay instead, or
• the surviving spouse of a veteran who died in service or from a service-connected disability.

The edge: your disability rating can change your cash to close

Most veterans are never asked this. If you receive VA disability compensation, the funding fee doesn’t apply, which on a larger loan can be thousands of dollars. Tell your loan officer on the first call, and bring your award letter.

If you have a disability claim that’s still pending, mention that too. I’m not certain how every pending case is handled, so I’d confirm the details with VA before closing, but it’s worth knowing the timing could matter.

What the funding fee is not

It isn’t an interest rate. It isn’t mortgage insurance. And it’s set by VA, not by the lender. If someone tells you they can cut it, ask them to show you in writing. Compare total cost, including the fee, rate and closing costs, when you look at VA and conventional options side by side. I wrote about the bigger picture in VA Loan Benefits Most Veterans Never Use.

A pitfall I see: forgetting the fee in the cash plan

This is a hypothetical, but it’s a pattern I see a lot. A veteran buying with nothing down assumes the numbers are simple. Nobody talks about the fee until the closing disclosure shows a larger loan balance than he expected. Nothing was wrong, but he’d planned his payment around a smaller loan. Ask for a payment estimate that includes the financed fee on day one.

Questions to ask your loan officer

1. Am I exempt from the funding fee? Bring your award letter if you have one.
2. What’s the exact fee for my loan type and down payment?
3. Is it being financed, and what does that do to my payment?
4. What does my total monthly payment look like with taxes and insurance?
5. How does this compare to a conventional option with mortgage insurance?

See my VA loan page for the full program, and my post on mortgage rates and VA borrowers if you run a business.

Why use a mortgage broker?

Let hundreds of lenders compete for your loan. You fill out one application.

Shopping for a mortgage on your own means applying again and again, sending the same documents over and over, and waiting on every quote. I do that part for you.

Here’s how it works:

1. Tell me your goals. I review them and structure your loan.
2. I shop it. I enter your scenario into my loan search system. It checks hundreds of lenders, including most of the big banks and big lenders, and sorts them by rate, APR (the yearly cost of the loan, including fees), monthly payment or total cost.
3. You get the best deal. If the lowest rate is your goal, I sort by rate, find the lender with the lowest rate at the moment you’re ready to lock, and lock it. Typically 350 or more lenders sit underneath with higher rates.

One application. One set of documents. Hundreds of lenders working for your business. I also make sure your application is accurate, so there are no surprises later.

Start your loan application here, and let me go to work! (opens in a new tab)

I’m a mortgage broker with NEXA Lending, and I work with borrowers in all nine states where I’m licensed (CA, CO, TX, FL, GA, NC, SC, TN, VA). As a broker, I can shop your loan across hundreds of lenders instead of being stuck with one bank’s programs. Programs, rates and approval depend on your full file, and individual rates vary.

Sources: VA, Funding fee and closing costs (opens in a new tab), VA, Home Loans (opens in a new tab).