Since 1944, the VA Home Loan Program has financed home purchases for over 18 million veterans. Because the Department of Veterans Affairs minimizes lender-risk by insuring the loans, financing is more readily available. Eight out of ten veterans are unable to qualify for conventional loans; because the program largely mitigates investors from the burden of borrower default qualifying guidelines are reduced for applicants. The loan program offers no down payment requirements, refinancing options; no required private mortgage insurance, no set credit minimum and several other cost reducing measures. In 2011, the Department of Veterans Affairs credited the program as being responsible for allowing 73,000 veterans who were in default to maintain their residence and avoid foreclosure. Furthermore, military members who have foreclosed or short sold in the past are not precluded from using the loan again. As long as the veteran has remaining entitlement they are potentially eligible to use the loan subsequently.
To lower the burden on American tax-payers and make the VA loan program financially sustainable a funding fee is required by the Department of Veterans Affairs. The funding fee is a one-time only, payment made upfront. The total amount called for is determined by the amount the military member is borrowing. If the borrower makes a down payment of greater than five percent, the funding fee will be reduced. The total fee is higher for borrowers who have previously used the VA loan program.
As stipulated in Chapter Eight of the VA Lender’s Handbook, the funding fee can be paid from “loan proceeds.” Meaning, the funding fee can be added to the VA loan. The final loan amount can be above the appraised value of the home. The only other closing cost that can be added to the loan amount is energy efficiency improvements.
An exemption to the funding fee exists for veterans who live with a service-related disability. To receive the exemption the borrower must either have a disability rating of 10 percent or be the recipient of disability payments from the VA.
Beginning on Jan. 1, 2021, funding fees will rise from 2.15% of your total loan amount to 2.30%. On this date, funding fees will be eliminated for Active Duty Purple Heart recipients. These changes were designed to help fund the medical needs of Vietnam veterans and their children who that suffer health problems due to exposure of Agent Orange.
The chart below illustrates the funding fee required when using the corresponding loan:
Purchase and Construction Loans
|Down Payment||Percentage for 1st Time Use||Percentage for
|No down payment||2.30 Percent||3.60 Percent|
|5-10 percent paid||1.65 Percent||1.65 Percent|
|10 percent or larger||1.40 Percent||1.40 Percent|
|Down Payment||Percentage for
1st Time Use
|No down payment||0.50 Percent||0.50 Percent|
Cashout Refinance Loan
VA Use Active Duty/Retired Reservist/National Guard
|First-time usage||2.30 Percent|
|Subsequent usage||3.60 Percent|
Interest Rate Reduction Loan
|VA Use||Active Duty/Retired||Reservist/National Guard|
|First-time usage||0.5 Percent||0.5 Percent|
|Subsequent usage||0.5 Percent||0.5 Percent|
For buyers assuming a VA loan mortgage, the funding fee 0.5 percent. Native Americans involved in the VA Native American Direct Loan program are only required to pay a funding fee of 1.25 percent.
For more information about the VA Loan program, contact VA Home Loan Centers.