For many veterans, a VA loan can be a lifesaver as it is an economic lifeline that may not be viable through other funding channels. It is important to note that while mortgage insurance is not required for a VA loan, recipients will incur a one-time VA loan funding fee.
These loans have more lenient credit terms and competitive interest rates than traditional mortgage loans. Moreover, they do not require mortgage insurance. In exchange for these concessions, most borrowers are required to pay a VA funding fee. This fee is a one-time charge that can be rolled into the mortgage or paid upfront by the borrower, regardless of whether the funds are used for home refinancing or the purchase of a new home.
VA loans are available to current service members, veterans, or spouses who meet the eligibility criteria, and they may be allocated as either VA-backed or VA direct home loans. These funding options are backed by the Department of Veterans Affairs, which agrees to repay the lender a portion of the loan in the event the borrower defaults. Th funding fee is designed to reduce the cost of the loan for American taxpayers since the VA home loan program does not require monthly mortgage insurance or down payments when purchasing a property.
The amount of the funding fee varies depending on how much is borrowed, the amount of the down payment a borrower is supplying, what type of loan, and whether the borrower has previously had a VA-backed or direct home loan. For veterans who have previously gotten a VA loan, the new loan is known as a subsequent use loan.
For first-time borrowers, fees for a VA purchase loan are as listed below:
- 2.3 percent with a down payment of 0-4.9 percent
- 1.65 percent with a down payment of 5-9.9 percent
- 1.4 percent with a down payment of 10 percent or more.
For subsequent use borrowers, the fees increase to 3.6 percent with a down payment of 0-4.9 percent, but the rates remain at 1.65 percent with a down payment of 5-9.9 percent and 1.4 percent with a down payment of 10 percent or more, respectively.
Moreover, the fees for cash-out refinance loans are on par with those for purchase loans, whereas the fee for an Interest Rate Reduction Refinance Loan, which is also known as a VA IRRRL loan, is 0.5 percent for both first-time and subsequent use borrowers.
It is also important that borrowers realize that a VA funding fee is not the only extraneous expense involved in purchasing or refinancing a home via the Department of Veterans Affairs. Like with traditional property transactions, there are often other closing costs factored into the equation, so borrowers must do their research ahead of time and negotiate which costs will be their responsibility.