VA funding fee explained: Costs, rates, and exemptions

VA loans reduce many home buying costs, but one unexpected charge may throw off your initial estimates: the VA funding fee. 

This fee sustains the VA loan program for future service members. While it serves an important purpose, not everyone has to pay it, and certain borrowers might be able to avoid the extra expense.

Even with the funding fee, VA loans can still reduce costs associated with conventional loans — they have low interest rates, no private mortgage insurance, and often have no down payment. 

What’s the funding fee for a VA loan?

The VA funding fee is a one-time payment borrowers pay when they buy or refinance a home with a VA loan. It goes to the Department of Veteran Affairs (VA) and helps maintain the loan program, reducing the burden on taxpayers. It also covers the cost of the VA loan guarantee, which protects lenders if the borrower defaults, allowing them to provide competitive loan rates. 

Buyers pay the funding fee at closing, along with more common costs like appraisal charges and title services. While many people handle this expense in one payment, you can reduce up-front costs by negotiating for seller concessions or rolling it into your total loan amount.

How much is the VA funding fee?

The VA funding fee is a percentage of your loan and isn’t a fixed price. Your cost depends on a few factors, including your loan type and down payment amount. 

Here are some common elements that influence VA loans:

— First-time versus subsequent use: Borrowers using a VA loan for the first time usually pay a lower percentage. If you’ve already used the benefit once or more, the fee increases for future mortgages.

— Loan type: Purchases and cash-out refinances usually come with higher costs. On the other hand, streamline refinances are designed to lower fees for government-backed borrowers and have a low, flat rate.

— Down payment amount: While down payments aren’t always a requirement for VA loans, putting some money down improves your funding fee costs. Borrowers who make no down payment usually have the highest rate.

— Exemption status: Certain groups, such as veterans with service-connected disabilities and members with a Purple Heart, may not need to pay the funding fee at all.

VA funding fee on refinance

This fee applies to VA-backed refinances as well as purchases. The program offers two types of refinancing: Interest Rate Reduction Refinance Loans (IRRRL) and cash-out refinancing.

An IRRRL, also called a streamline refinance, helps borrowers lower their interest and switch from adjustable to fixed rates. They have a steady 0.5% funding fee percentage, whether it’s your first or subsequent loan use.

Cash-out refinancing lets homeowners use their equity to get a lump sum payment, replacing their current mortgage with a larger one. These loans usually carry a higher funding fee comparable to a home purchase without a down payment.

Here’s a quick summary of VA funding fee rates by type:

Loan Type	First Time Loan Use	Subsequent Use
Home purchase (no down payment)	2.15%	3.3%
Home purchase (5% or more down)	1.15%	1.15%
Home purchase (10% or more down)	1.25%	1.25%
IRRRL	0.5%	0.5%
Cash-out refinance	2.15%	3.3%

While these percentages seem a little confusing, Better can help you compare loans and discover the unique costs for your situation. Our VA-approved process streamlines every step and keeps rates transparent, so you can choose the right loan faster.

...in as little as 3 minutes – no credit impact

Who’s exempt from the VA home loan funding fees?

There are a handful of borrowers who don’t need to pay the VA funding fee. Here are the groups who may be exempt:

— Veterans with a service-connected disability who are eligible or collecting compensation.

— Surviving spouses receiving Dependency and Indemnity Compensation.

— Service members with a Purple Heart who are active duty at the time of closing.

— Certain veterans who are entitled to disability compensation but are receiving retirement or active duty pay instead.

The VA determines exceptions during the loan review, and if you qualify, they’ll write it on your Certificate of Eligibility (COE). This serves as proof of exemption and helps your lender correctly estimate your loan.

How do you pay the funding fee for VA loans?

Borrowers have a few options for covering the VA funding fee cost. Here are a few common practices:

— Up front at closing: This means you pay the fee in cash at closing. This brings your loan balance down but requires a lump sum payment up front.

— Rolled into the loan balance: Many choose to add the funding fee into their total loan to avoid a large out-of-pocket expense. The trade-off is that you’ll pay interest on the fee over the life of the loan.

— Seller concessions: These incentives can cover the VA funding fee as part of the purchase agreement. Sellers typically offer them during negotiations to increase the value of the deal for the buyer. 

The ideal method for paying your VA loan fee depends on whether you’d prefer lower monthly payments or less cash due at closing. Suppose you have just enough to cover the other expenses of closing costs, such as origination fees and title services. Rolling the funding fee into your loan and increasing your payments may be the best option.

Of course, if you can negotiate concessions, you can reduce monthly and up-front costs. This is most common in a buyer’s market, where a seller is particularly motivated to make the deal.

VA funding fee refunds

You can remove the funding fee if you receive a retroactive disability rating or the fee was applied in error. For example, if you pay the funding fee and later receive a disability award from the VA, you may qualify for reimbursement. 

Suppose you close on your home in June and are awarded a service-connected disability rating in July. If the award is backdated to before closing, you could be refunded the full amount you paid.

Refunds are not automatic, so contact your lender to start the process. You’ll typically need your original closing documents, updated COE, and disability award letter. Keep in mind that some mortgage providers may be unfamiliar with funding fee refunds. In this case, contact the VA directly for next steps.

Manage transparent fees with Better

Funding fees keep the VA loan program sustainable for years to come, but they don’t have to be overwhelming. Ask your lender for an estimate in advance and you can handle this charge like any other — you could even be exempt. You can break down every home buying cost and understand every step of the process with Better..

Better provides VA mortgages for various service members, including veterans, surviving spouses, and certain reservists. They have no down payment and flexible credit standards, making homeownership easier and more affordable. Apply in as little as three minutes to unlock custom mortgage rates, a personalized dashboard, and access to 24/7 customer support. 

Manage home finances confidently with Better.

...in as little as 3 minutes – no credit impact