If you're a member of the U.S. military, a former member, or a surviving spouse, you may be entitled to a VA loan. Many mortgage lenders provide VA loans in addition to conventional mortgages (mortgages that meet the underwriting standards of Fannie Mae or Freddie Mac), and while they do come with a VA funding fee, applying for one has its benefits.
First, it's often easier to qualify for a VA loan than a conventional mortgage since these loans are backed by the U.S. Department of Veterans Affairs. Of course, the higher your credit score, the greater your chances of getting approved for a VA loan, but you may be able to get away with a lower score than you'd need for a conventional mortgage.
Furthermore, VA loans allow you to buy a home with no money down. That does mean it will take longer to build equity in your home. However it's a good option if you're in a strong enough financial position to pay your monthly mortgage costs, but simply lack the savings for a down payment.
VA loans aren't perfect. Like conventional mortgages, they come with closing costs that include loan origination fees, title insurance, and appraisal costs. And unlike other mortgages, VA loans also come with the aforementioned VA funding fee. Here, we'll review how funding fees work so you'll know what to expect if you decide to move forward with a VA loan.
A VA funding fee is a one-time payment that VA loan borrowers pay when they sign this type of mortgage. VA loans are backed by the Department of Veterans Affairs, and that entity will be on the hook for repaying a portion of your mortgage if you default. The funding fee you're charged helps offset some of the costs associated with that VA guarantee, and it also helps ensure that this loan program stays available for future applicants.
The cost of a VA funding fee depends on whether this is your first VA loan, and whether or not you're planning to make a down payment on your home.
Your funding fee on your first VA loan without a down payment will equal 2.3% of your loan. For a subsequent application without a down payment, your fee will equal 3.6%.
If you're able to make a down payment of at least 5% on your home, but less than 10%, your VA loan funding fee will be 1.65%. This holds true whether it's your first VA loan or a subsequent one. With a down payment of 10% or more, your VA funding fee will be 1.4% whether or not it's your first time.
Here's a VA funding fee summary:
|Applicant Status||Down Payment||Funding Fee|
|First VA Loan||Under 5%||2.3%|
|First VA Loan||5% or more||1.65%|
|First VA Loan||10% or more||1.4%|
|Subsequent VA Loan||Under 5%||3.6%|
|Subsequent VA Loan||5% or more||1.65%|
|Subsequent VA Loan||10% or more||1.4%|
You'll generally pay a funding fee any time you take out a VA loan or refinance one. That fee gets paid when you close on your mortgage. In some cases, you may be able to ask your seller to pay that funding fee for you. Or, you may opt to roll it into your mortgage and pay it off over time if you don't have the money up front.
When you refinance a mortgage, you swap one home loan for another, typically at a lower interest rate. You will pay a funding fee when you refinance a VA loan. If you get an Interest Rate Reduction Refinance Loan (IRRRL), your funding fee will be 0.5% regardless of whether this is your first time refinancing or not. This is where you simply lower the rate on your mortgage.
If you do a cash-out refinance, you'll be subject to a 2.3% funding fee for your first refinance, and a 3.6% fee for a subsequent one. A cash-out refinance is where you borrow an amount that exceeds your outstanding mortgage balance and receive the excess in cash form to use as you please.
There are certain circumstances under which you may not need to pay a funding fee for a VA loan. If you meet any one of the following criteria, that fee will be waived:
If you end up paying a VA loan funding fee, you could be eligible for a refund on it if you're later awarded compensation for a service-related disability.
Though VA loan funding fees are often unavoidable, VA mortgages are still an affordable way to finance a home purchase. If you're looking to buy a home in the near future, it pays to shop around for the best lenders for VA loans. If you take the time to compare mortgage rates, you'll increase your chances of locking in the best deal.
A funding fee is a preset fee that applies to VA loans.
Funding fees generally apply to all VA loans, including first-time loans, subsequent loans, and refinances. However, these fees may be waived under certain circumstances.
Funding fees range from a low of 1.4% to up to 3.6%. Your funding fee will depend on whether this is your first VA loan and the amount of your down payment, if you're making one.
Funding fees can be waived under certain circumstances -- generally, if you're receiving disability compensation or are eligible for it, or are the surviving spouse of a veteran who died in the line of duty or from a service-related disability.
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