First-Time VA Purchase Loan Funding Fee for Less Than 5% Down

Historically, members of the National Guard and Reserves paid a slightly higher funding fee than regular military Veterans. However, recent rate charts (such as those effective from 2020 through early 2023) show a unified rate for first-time purchase loans with less than 5% down. According to these circulars, the rate is 2.3% for “First Use” with “Less than 5%” down, without a separate distinction listed in that specific table for Reserve/Guard status. However, borrowers should always check their specific Certificate of Eligibility (COE), as it will definitively state the applicable funding fee status and whether any increased rates apply.

If you are awarded service-connected disability compensation after your loan closes, you might be eligible for a refund of the funding fee, but only under specific circumstances. The effective date of your VA disability award must be retroactive to a date prior to your loan closing. If this is the case, you are treated as if you were exempt at the time of closing. If you financed the fee, the refund is applied as a principal reduction to your loan balance. If you paid cash, it is refunded to you. You must contact the VA Regional Loan Center to initiate this process.

The VA funding fee structure uses specific tiers based on the down payment percentage. If your down payment is anything less than 5% of the purchase price (for example, 3% or 4%), you typically remain in the highest fee category for that loan type. For a first-time purchase loan, the rate remains 2.3% for any down payment amount that falls between 0% and 4.99%. To qualify for the reduced funding fee rate of 1.65%, you must make a down payment of 5% or more. Therefore, small down payments generally do not reduce the funding fee percentage.

The funding fee percentage (2.3% for first-time use with less than 5% down) is applied to the loan amount before the fee is added. For example, if you are purchasing a home for $200,000 with zero down, the base loan is $200,000. The fee is calculated as 2.3% of $200,000, which equals $4,600. If you choose to finance the fee, it is added to the base, making your total loan $204,600. The fee percentage is not applied to the final $204,600; it is strictly calculated against the base loan amount required to purchase the home.

Yes, the seller is allowed to pay the VA funding fee on your behalf as part of “seller concessions.” VA regulations allow sellers to pay concessions up to 4% of the reasonable value of the property. These concessions can cover various costs, including the funding fee, prepayment of property taxes, or payment of extra points to lower your interest rate. If the seller agrees to cover this cost during negotiations, it can significantly reduce your loan balance (since you won’t have to finance the fee) or reduce the cash you need to bring to the closing table.

Yes, certain borrowers are legally exempt from paying the VA funding fee, regardless of whether it is their first or subsequent use. You are exempt if you are receiving VA compensation for a service-connected disability, or if you would be entitled to receive such compensation if you were not receiving retirement pay. Surviving spouses of Veterans who died in service or from a service-connected disability are also exempt. Additionally, active duty service members who have been rated eligible for compensation based on a pre-discharge exam may be exempt. If exempt, you pay zero funding fee.

One of the most significant advantages of a VA loan is the absence of monthly private mortgage insurance (PMI). On conventional loans with less than 20% down, borrowers must pay PMI every month, which does not build equity. The VA funding fee replaces this requirement. For a first-time user with less than 5% down, the fee is a one-time charge of 2.3%. While this seems like a large upfront sum, it is generally cheaper over the long term than paying monthly mortgage insurance for several years, and it can be financed into the loan balance to avoid upfront pocket costs.

Yes, you are permitted to finance the VA funding fee into your loan amount. In fact, most first-time borrowers choosing the zero-down option (less than 5% down) elect to roll the fee into their mortgage rather than paying it in cash at closing. The VA allows the total loan amount to exceed the reasonable value of the property specifically to accommodate the cost of the funding fee. This ensures that you can still purchase a home with little to no upfront capital, though financing the fee means you will pay interest on it over the life of the loan.

The VA funding fee serves a critical role in keeping the home loan program running for future generations of Veterans. Since the VA home loan program typically requires no down payment and prohibits lenders from charging monthly private mortgage insurance (PMI), the government takes on significant risk. This one-time fee helps lower the cost of the loan for U.S. taxpayers by offsetting the potential losses the VA might incur if loans go into default. Essentially, it acts as a substitute for the mortgage insurance premiums that are required on FHA and conventional loans with low down payments.

For a Veteran or service member using their VA home loan benefit for the very first time to purchase a home, the funding fee is set at a specific percentage of the loan amount. According to recent VA circulars, if you are making a down payment of less than 5%—which includes the popular zero-down option—the funding fee is calculated at 2.3% of the total loan amount. This percentage applies to the base loan amount before the fee is added. This rate is set by law to help sustain the loan program and is distinct from the higher rates charged for subsequent uses of the benefit.