Understanding VA Funding Fees

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I’m working on the Kashman family’s two, five and ten year financial plans,*  and I’ve discovered that I know less than I thought about Department of Veterans Affairs (VA) mortgage program funding fees.  It seems I had some misconceptions all along, and I hope that you can learn from my errors.

As part of the big picture, the Kashmans hope to buy another house, someday.  I’m making sure that we’ll have enough down payment, and that our debt-to-income ratio is OK.  As you know, we have two houses that are currently rental properties, and they both have mortgages.  Even though they are doing well for us, those mortgages still count as debt.  So we need to plan and prepare if another house is in our future.

That’s where my confusion happened.  When you get a VA home loan, you pay a funding fee.  This is unique to VA loans.  Funding fees on your first VA loan are less than on subsequent loans IF YOU HAVE LESS THAN 5% down payment.  I wrote that in all caps because that was the part that confused me.  Somewhere along the way, I got the misconception that the funding fee was always very high on subsequent mortgages.  I wasn’t completely wrong, because it is high if you have a very low down payment, but the funding fee on second and subsequent purchases is exactly the same as for first VA loans, if you have 5% or more to apply as a down payment.

My husband used his VA eligibility when we purchased our first home, back in the dinosaur era.  We’ve used conventional financing since, because I was scared of the maximum 3.3% funding fee on subsequent usage.  As it turns out, the funding fee would only be 3.3% if we had less than 5% down payment.  For down payments between 5% and 10%, the funding fee would be 1.5%.  For down payments over 10% of the purchase price, the funding fee would be 1.25%.

What does this mean for me, and for you?  It means that a VA loan can remain a viable option for loans, even if you’ve already had a VA loan in the past.  VA funding fees do increase the cost of your loan, but sometimes VA loan rates are lower than regular rates, and you might find the total cost of the loan is the same.  In the case where you have less than 20% down payment, and would be required to make Private Mortgage Insurance (PMI) payments on a conventional loan, a VA loan will nearly always lower your monthly payment.  In addition, VA loan debt-to-income guidelines are slightly more generous than conventional loan guidelines.  Borrowers like me, who already have other mortgages, might find that they are able to qualify for a VA loan when they do not qualify for a conventional loan.

As always, knowing the facts is an important part of making a plan.  I’ve learned some new facts today, and I hope you have, too.

 

*  Yes, I am a dork.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • guest

    on our last house (3 years ago) we found that Wells Fargos military express program blew VA funding options out of the water. VA loans had somewhat higher than average national rates through most banks. Plus, Wells will discount the national going rate by a quarter point through the program since it is for a PCS move. In addition, their closing costs through the program were next to nothing…I think we paid a total of 2k (not including our 10% down) whereas all of the other options (including USAA etc) wanted 5-6k closing. They don’t readily advertise all of the perks on their website but it is WELL worth calling them about it, and if it’s still the same might be worth a post. It looks like they pushed the link to that program on the bottom right of their main mortgage page.

    You may also want to point out that if you have a 20% down payment a VA loan is usually a loser right off the bat since conventional loans there would be no PMI whereas you still have the VA funding fee.

    • KateKashman

      Hi Guest! Thanks for telling us about the Wells Fargo program. I agree that it is often the case that a 20% down payment makes a conventional loan better, but the rates and fees aren’t always the same. Yesterday, just as an example, using a 30 year fixed rate loan, the APR on the VA loan was lower than the APR on the conventional loan. The APR does not include the funding fee, though, so more math has to be done to determine which product is right in each individual situation.

      Great comment! Thank you.

    • Bruce Glassinger

      I know this is late coming but VA is not completely a loser when compared to conventional at 20% down. Veterans, you want to compare both rates first. VA will be less. However, and as mentioned in Kate’s article, there will be a 1.25% funding fee if you are putting 20% down. Now ask your lender what the rate would be if they pay the funding fee for you.

      This is more than likely what Wells is doing. Any lender can do this. The funding fee charge cannot be changed. That is set by VA. A lender can only pay a portion or all of it for you. However, that amount is still paid to VA whether you pay it or the lender…or even the seller.

      Now back to the rate comparison. After the 1.25% lender credit is applied, which may or may not raise the rate, compare rates then. More than likely, the winner is still VA.

      I work for BNC National Bank and as a courtesy to our veterans, we do not charge any bank fees on our VA loans. I have compared countless loans where there was a significant down payment and about 9 times out of 10, VA won out, mainly due to the large lender credits I can offer along with no fees.

      • Danielle

        Bruce, what states do you do mortgages in? If you do them in GA, I’d like your information.

        Realtor, Atlanta GA & Military Family

  • Gareth

    If you are a disabled Veteran, it gets even better! Your VA funding fee is waived completely! I am in the middle of refinancing and it saved me a few thousand.

  • Scott Jaime

    If I am refinancing from a conventional loan to a VA for a lower interest rate and I am a veteran, what percentage will my funding fee come out to be?

    Thank you!

  • mparker

    I had VA funding fee incorrectly assessed on an initial mortgage and again on a refinance. The lender and VA blame each other. I am exempt from the VA funding fee. Is anyone had this problem of the VA funding fee being incorrectly assessed?

  • Jay Sheldrake

    Remember it must be your primary residence and if you are a disabled vet some states very large tax breaks on your property taxes…..along with the homestead