Funding Fee on Non-Veteran Portion of Joint Loan
Funding Fee on Non-Veteran Portion of Joint Loan
When a VA loan is taken out jointly by a Veteran and a non-Veteran, special rules apply to how the VA funding fee is calculated. The funding fee is not automatically charged on the entire loan amount. Instead, it applies only to the portion of the loan attributable to the non-Veteran borrower. Understanding how the Funding fee on non-Veteran portion of joint loan is determined is essential for accurate loan structuring, proper disclosure, and ensuring compliance with VA guidelines while minimizing unnecessary costs for the Veteran.
The Department of Veterans Affairs (VA) Home Loan program allows for “joint loans,” which are defined as loans where the Veteran and another person (who is not their spouse) are liable, and both own the security. A common iteration of this is a loan made to a Veteran and a non-Veteran who is not a spouse. While these loans allow borrowers to combine income and assets to qualify for a home, they trigger specific and distinct rules regarding the calculation of the VA Funding Fee. Unlike standard VA loans where the fee applies to the total loan amount, joint loans involving a non-Veteran segregate the loan obligations to ensure the Veteran only pays for the benefit they receive.
The "Allocable Portion" Rule
The fundamental principle governing funding fees in this context is that the VA funding fee is assessed only on the portion of the loan allocable to the Veteran using their entitlement. The VA explicitly states that no funding fee will be assessed on any portion of a joint loan allocable to a non-Veteran. Furthermore, no fee is charged to a Veteran who did not use his or her entitlement on the loan, or to a Veteran who is otherwise exempt from the fee due to a service-connected disability.
This distinction is vital because the VA guaranty itself is limited to the Veteran’s interest in the property. Since the non-Veteran’s portion of the loan is not guaranteed by the VA, the administration does not levy a fee on that specific portion of the debt.
Calculating the Funding Fee
To determine the correct funding fee, lenders must follow a specific calculation method rather than simply applying the fee percentage to the total loan amount.
- Determine the Loan Allocation: The total loan amount is divided equally by the number of borrowers to determine the allocable share for each party. For example, in a loan with one Veteran and one non-Veteran, the loan amount is split 50/50.
- Identify the Veteran’s Share: The lender isolates the specific dollar amount attributed to the Veteran.
- Apply the Percentage: The appropriate funding fee percentage—determined by the Veteran’s branch of service, reserve status, and whether this is a first or subsequent use of entitlement—is applied only to the Veteran’s half of the loan.
Impact of Down Payments
A critical nuance in this process involves how down payments affect the fee calculation. VA guidelines stipulate that the actual loan amount is allocated equally between the borrowers for the purpose of calculating the funding fee, regardless of who provided the cash for the down payment.
For example, consider a scenario where a Veteran and a non-Veteran purchase a home for $100,000. The non-Veteran provides $5,000 from their own resources as a 5% down payment, resulting in a total loan amount of $95,000. Even though the non-Veteran paid the down payment, the VA views the $95,000 loan obligation as shared equally. Therefore, the $95,000 is divided by two, resulting in a $47,500 portion for the Veteran. The funding fee is calculated based on $47,500, not the full $95,000. If the Veteran is a first-time homebuyer with a standard military background, the fee percentage (e.g., 1.5% for a loan with a 5% down payment) would be applied to the $47,500 figure.
Distinction from Two-Veteran Joint Loans
It is important to distinguish Veteran/non-Veteran loans from joint loans involving two Veterans who are both using their entitlement. In a two-Veteran joint loan, the funding fee is still calculated based on each Veteran’s equal share of the loan. However, because both parties are utilizing the VA benefit, the funding fee is assessed on both portions (unless one or both Veterans are exempt). In a Veteran/non-Veteran loan, the non-Veteran’s portion remains entirely free of the funding fee assessment.
The VA’s policy on funding fees for joint loans ensures fairness by aligning the cost of the benefit with the extent of the guaranty provided. By exempting the non-Veteran’s portion of the loan from the funding fee, the VA acknowledges that the government backing does not extend to that borrower’s share of the obligation. Lenders must exercise care to calculate these fees based on the equal allocation rule, regardless of which borrower contributes to the down payment, to ensure the Veteran is not overcharged at closing.
FAQ's
No, the loan type does not change the fact that the non-Veteran is not assessed a fee; however, it does change the rate applied to the Veteran. For a Cash-Out Refinance involving a joint loan, the Veteran is assessed the Cash-Out funding fee rate (generally 2.3% for first use or 3.6% for subsequent use) on their share of the loan. The non-Veteran’s portion remains fee-free. It is important to note that reduced funding fee rates for equity/down payments do not apply to Cash-Out Refinances, so the Veteran will pay the full applicable rate on their half of the debt regardless of the loan-to-value ratio.
Yes, the seller can pay the funding fee on a joint loan as part of allowed seller concessions. VA regulations permit the seller to pay fees and charges on behalf of the borrower, including the VA funding fee. In a joint loan, even though the fee is calculated based only on the Veteran’s portion, the seller can cover this cost to reduce the cash to close for the borrowers. However, the total value of seller concessions, which includes the payment of the funding fee and other gifts or debt payoffs, must not exceed 4% of the property’s reasonable value.
If there are multiple non-Veterans and one Veteran on a joint loan, the loan amount is divided equally by the total number of borrowers to determine the Veteran’s share. For instance, if there is one Veteran and two non-Veterans (three borrowers total), the Veteran is responsible for the funding fee on one-third (33.3%) of the loan amount. The remaining two-thirds, allocated to the two non-Veterans, are not assessed a funding fee. This ensures that the fee remains proportional to the specific risk and entitlement usage associated with the single Veteran borrower involved in the multi-party transaction.
No, the “Subsequent Use” rate does not apply to the non-Veteran’s portion because the non-Veteran is never assessed a fee. However, the “Subsequent Use” determination is critical for the Veteran’s portion. If the Veteran has used their home loan benefit previously, the higher funding fee percentage (typically 3.6% for zero down) is applied to the Veteran’s half of the loan. The non-Veteran’s status is irrelevant to this percentage. The total fee is simply the Veteran’s specific rate (First or Subsequent) multiplied by their specific share of the loan amount, with the non-Veteran’s share remaining free of any VA statutory charges.
Yes, the funding fee can be financed into the total loan amount. Once the fee is calculated based on the Veteran’s share of the debt, that specific dollar amount can be added to the total principal of the loan that both borrowers sign for. This increases the total loan amount for both the Veteran and the non-Veteran. While the fee itself is derived only from the Veteran’s portion, the liability for the final loan amount—including the financed fee—is joint and several. This allows the borrowers to close the loan without paying the fee in cash, consistent with standard VA loan policies.
If the non-Veteran is the Veteran’s spouse, the special “joint loan” funding fee calculations do not apply. A loan involving a Veteran and their non-Veteran spouse is treated as a standard VA loan, not a joint loan, for underwriting and fee purposes. In this scenario, the funding fee is calculated based on the full loan amount, not just a 50% share. The “split” calculation is reserved specifically for joint loans involving non-Veterans who are not the spouse of the Veteran. Therefore, a Veteran borrowing with a spouse will pay a fee on the total principal balance unless an exemption applies.
Yes, a down payment can reduce the funding fee percentage applied to the Veteran’s portion of the loan, regardless of which borrower provides the funds. The VA calculates the funding fee percentage based on the total down payment relative to the total loan amount. If the non-Veteran provides a 5% or 10% down payment from their own funds, this lowers the risk profile of the loan. Consequently, the Veteran qualifies for the lower funding fee tier (e.g., 1.65% instead of 2.3% for first-time use). This lower percentage is then applied specifically to the Veteran’s allocated share of the loan.
No, if the Veteran borrower is exempt from the funding fee—usually due to receiving service-connected disability compensation—then no funding fee is collected for the entire transaction. VA regulations stipulate that no fee is assessed on the non-Veteran’s portion of the loan in any case. Furthermore, if the Veteran is exempt, no fee is assessed on their portion either. Consequently, the total fee due to the VA is zero. The non-Veteran does not “inherit” the fee obligation; the fee is attached strictly to the use of entitlement, and since the non-Veteran uses no entitlement and the Veteran is exempt, the cost is waived entirely.
To determine the funding fee, the total loan amount is allocated equally among all borrowers on the loan. For a standard joint loan with one Veteran and one non-Veteran, the loan is split 50/50 for calculation purposes. The funding fee percentage is applied only to the Veteran’s 50% share of the loan. For example, on a $200,000 loan, the fee is calculated based on $100,000. This equal allocation method applies regardless of the actual income contributions of the borrowers or how they plan to split the mortgage payments personally. The VA requires this strict mathematical division to ensure the government is only guaranteeing and charging fees on the portion attributable to the eligible benefit holder.
No, the VA funding fee is not assessed on the portion of the loan allocated to the non-Veteran borrower. In a joint loan scenario involving a Veteran and a non-Veteran (who is not a spouse), the VA regulations specifically state that no funding fee is to be collected on the non-Veteran’s share of the loan. The fee is strictly a charge associated with the usage of the Veteran’s entitlement. Therefore, the total funding fee due to the VA at closing will be significantly lower than a standard VA loan because it is calculated against only half (or the proportionate share) of the total loan amount, provided the non-Veteran is not using any VA entitlement.
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