If you’re a veteran, active-duty service member, or surviving spouse looking to buy a home using a VA loan, one term you’ll often hear is the VA funding fee. While it may seem like an extra cost, understanding how it works and knowing strategies to reduce it can save you thousands of dollars. In this guide, we’ll break down what the funding fee is, why it matters, and actionable strategies to minimize it.
What Is the VA Funding Fee?
The VA funding fee is a one-time payment required by the Department of Veterans Affairs (VA) when you take out a VA-backed home loan. This fee helps offset the costs to taxpayers and ensures that the VA home loan program remains available for eligible borrowers in the future.
Unlike private mortgage insurance (PMI), which non-VA borrowers pay when putting less than 20% down, the funding fee is unique to VA loans. While it might feel like an extra cost, it supports a program that allows eligible military borrowers to purchase homes with no down payment in many cases.
Standard VA Funding Fee Rates
The fee is calculated as a percentage of the loan amount and varies depending on whether it’s your first VA loan, subsequent use, or if you make a down payment. Standard rates include:
- First-time use, no down payment: 2.15%
- Subsequent use, no down payment: 3.3%
- With a 5% down payment: 1.5%
- With a 10% down payment: 1.25%
Example: On a $300,000 home purchase, a 2.15% funding fee would be $6,450.
Why the VA Funding Fee Matters
The funding fee allows the VA loan program to continue offering low-cost financing without relying heavily on taxpayer dollars. While it’s an investment in sustaining the program, reducing this fee can save you a significant amount—especially on higher-priced homes.
Strategies to Lower Your VA Funding Fee
1. Increase Your Down Payment
Making a larger down payment is one of the simplest ways to reduce your funding fee. The VA fee percentage decreases as your down payment increases:
- 5% Down Payment: Fee drops to 1.5%
- 10% Down Payment: Fee drops to 1.25%
Example: For a $300,000 home with a 5% down payment, your funding fee would be $4,275, saving over $2,000 compared to the standard 2.15% fee.
2. Qualify for an Exemption
Some borrowers are entirely exempt from the VA funding fee. Exemptions include:
- Veterans receiving VA compensation for a service-connected disability
- Surviving spouses of veterans who died in service or from a service-connected disability
- Active-duty service members who received a Purple Heart
Tip: Always confirm your exemption status with a VA loan officer before closing.
3. Choose a Smaller Loan Amount
Since the funding fee is a percentage of your loan, a smaller loan naturally reduces your total cost. Consider:
- Increasing your down payment
- Choosing a less expensive home
- Paying closing costs upfront instead of rolling them into your loan
4. Consider Refinancing
If you already have a VA loan, refinancing through the Interest Rate Reduction Refinance Loan (IRRRL) program can reduce your funding fee to just 0.5% of the loan amount. This is ideal for lowering monthly payments while saving on the funding fee.
Example: Refinancing a $250,000 loan would require only $1,250 for the funding fee.
5. Opt for a VA Assumption Loan
In certain cases, you can transfer your VA loan to another eligible borrower, which avoids paying a new VA funding fee altogether.
When it’s useful:
- Selling your home to a buyer who qualifies for VA financing
- Transferring ownership to a family member who meets VA eligibility
6. Plan for Multiple VA Loan Uses
If you’re buying a second home with a VA loan, the funding fee increases. To avoid paying a higher fee, consider waiting until your first VA loan is fully paid off before taking another.
7. Time Your Purchase Wisely
The VA occasionally updates funding fee rates based on federal policy changes. By staying informed and timing your purchase strategically, you may secure a lower funding fee rate.
8. Explore State and Local Assistance Programs
Some states and local programs offer grants or financial assistance to help cover VA funding fees or down payment costs. Check with your state housing agency or local VA offices for available programs.
Additional Tips to Save Money
- Use VA Loan Calculators: Estimate your costs upfront to plan your budget.
- Consult a VA Loan Specialist: Experts can guide you in minimizing your funding fee based on your unique situation.
- Stay Informed: Funding fee rates occasionally change, so stay updated.
- Bundle Costs Wisely: While rolling the fee into your mortgage is possible, paying upfront saves interest over the life of the loan.
Common Misconceptions About the VA Funding Fee
- “It’s optional.” Only certain veterans or spouses are exempt. Most borrowers must pay unless they qualify.
- “It covers closing costs.” The funding fee is separate, though some lenders allow rolling both into the mortgage.
- “Refinancing always reduces it.” Only IRRRL refinancing automatically lowers the fee; other refinance options may not.
Conclusion
Reducing your VA funding fee is possible with careful planning and strategy. From making a larger down payment and qualifying for exemptions to refinancing or choosing smaller loans, there are several ways to save thousands of dollars. By staying informed and working with a VA loan specialist, you can maximize your savings while taking full advantage of the VA home loan program.
Remember, the VA funding fee supports a program that allows eligible service members and veterans to achieve homeownership with minimal upfront costs. Understanding your options ensures you benefit financially while securing the home you deserve.
FAQs
Can I avoid the VA funding fee completely?
Yes, if you qualify for an exemption due to service-connected disability, Purple Heart, or as a surviving spouse.
Does the funding fee apply to refinancing my VA loan?
It depends. For IRRRL refinancing, the fee is only 0.5%, but other refinance types may have different rates.
How much can I save by making a down payment?
A 5% down payment reduces the fee from 2.15% to 1.5%, and a 10% down payment lowers it further to 1.25%. Savings can range from thousands of dollars depending on the loan size.
Can state programs help with the VA funding fee?
Yes, some state and local programs offer grants or financial assistance to help cover the funding fee or
costs.
Should I roll the funding fee into my loan or pay upfront?
Paying upfront saves you interest over the life of your loan, while rolling it into the mortgage spreads the cost but increases total interest payments.