VA Funding Fee and Costs

Yes, there are specific fees you are prohibited from paying. For example, you cannot be charged for attorney’s fees if the attorney is retained by the lender, though you can pay for independent legal representation. You are also prohibited from paying brokerage fees or commissions to real estate agents in connection with the loan. Additionally, you cannot pay prepayment penalties to discharge existing liens on a property you are purchasing or refinancing. Lenders must cover costs like loan closing fees, document preparation, and interest rate lock-in fees out of their 1% flat charge.

If you pay the funding fee at closing but are later awarded disability compensation with an effective date retroactive to before your loan closed, you are entitled to a refund. If you paid the fee in cash, you will receive a cash refund. However, if you financed the fee into your loan amount, the lender must apply the refund as a reduction to your principal loan balance rather than issuing you a check. You should contact the VA Regional Loan Center to initiate this process if you believe you are eligible.

If you take out a joint loan with a non-Veteran (who is not your spouse), the funding fee is not charged on the total loan amount. Instead, the fee is calculated only on the portion of the loan allocable to the Veteran using entitlement. For example, in a loan split equally between a Veteran and a non-Veteran, the fee percentage is applied only to the Veteran’s half of the loan. No funding fee is assessed on the non-Veteran’s portion or on any portion allocable to a Veteran who is exempt from the fee.
 

Yes, a seller can pay your funding fee and other closing costs. VA distinguishes between standard closing costs and “seller concessions.” A seller can pay all of your normal closing costs and discount points without a limit. However, “concessions”—which include things like paying your funding fee, prepaying your property taxes, or paying off your credit balances—are limited to 4% of the property’s reasonable value. This allows you to reduce your out-of-pocket expenses significantly, but care must be taken to ensure the total value of concessions does not exceed this 4% cap.

The funding fee varies significantly between refinance types. For an Interest Rate Reduction Refinance Loan (IRRRL), which is a streamline refinance, the fee is a flat 0.5% regardless of whether it is your first or subsequent use of the benefit. Conversely, a Cash-Out Refinance is treated similarly to a purchase regarding usage history; it requires a 2.3% fee for first-time users and a 3.6% fee for subsequent users. Unlike purchase loans, however, Cash-Out Refinances do not offer reduced fee tiers for having higher equity in the property.

VA regulations strictly limit the fees a lender can charge you. You may pay a flat charge of up to 1% of the loan amount to cover the lender’s overhead costs,. In addition to this flat fee, you can pay reasonable and customary amounts for specific itemized charges, including appraisal fees, recording fees, credit report charges, prepaid taxes and insurance, flood zone determinations, and title examination or insurance,. You generally cannot be charged for overhead costs like settlement fees, notary fees, or tax service fees, which must be covered by the lender’s flat fee.

Yes, you are permitted to finance the VA funding fee. For all VA loan types, including purchases and refinances, regulations allow the funding fee to be included in the total loan amount. This is distinct from other closing costs; for regular purchase loans, you generally cannot finance other costs like title work or credit reports. If you choose to finance the fee, it is added to your principal balance, meaning you will pay interest on it over the life of the loan. Alternatively, you can pay the fee in cash at the closing table.

Yes, certain borrowers are legally exempt from paying the fee. You are exempt if you receive VA compensation for a service-connected disability or if you would be entitled to such compensation if you were not receiving retirement pay. Additionally, you are exempt if you are rated eligible for compensation based on a pre-discharge exam or review, or if you are the surviving spouse of a Veteran who died in service or from a service-connected disability. Your lender verifies this status using your Certificate of Eligibility (COE) or a verification form (VA Form 26-8937) prior to closing.

The fee percentage depends on your military category, down payment amount, and whether you have used the benefit before. For a purchase loan with less than a 5% down payment, a first-time user pays 2.3% of the loan amount, while a subsequent user pays 3.6%. You can lower this fee by making a down payment of 5% or 10%. For example, a down payment of 5% reduces the fee to 1.65% for both first and subsequent users. These reduced rates apply only to purchase loans, not to Cash-Out Refinances.

The VA funding fee is a mandatory one-time charge authorized by law to help defray the administrative costs of the VA Home Loan program. Because VA loans generally do not require a down payment or monthly private mortgage insurance (PMI), this fee is collected to lower the cost of the loan for U.S. taxpayers. The fee applies to most loan types, including purchases and refinances, unless you meet specific statutory requirements for an exemption. While the fee is a closing cost, the VA allows you to finance the fee into your loan amount rather than paying it in cash.