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What is the VA Funding Fee?

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A common question from California Veterans when applying for a VA loan is “What is the VA Funding Fee?” The VA mortgage program has many benefits, including no down payment and no monthly mortgage insurance. There is one unique cost however, that is known as the VA Funding fee. The funds from this fee go directly to the VA to help cover potential losses on mortgages that default. The VA Funding Fee is based on a percentage of the loan amount that is dictated by the type of military service that the Veteran performed. Other factors that play a role in the size of your Funding Fee include whether you are paying a down payment or are a first time VA borrower. When it comes to paying the VA Funding Fee, the borrower has the option to either include the VA Funding Fee as part of the loan amount or to pay it in cash upon loan closing.

Example of First Time Use VA Funding Fee

In most cases the Veteran will choose to finance the VA funding Fee into the loan. For example, using the chart below, let’s assume a Regular Military Veteran is purchasing a $400,000 California home with $0 down payment and will be using the VA Home Loan benefit for the first time. The VA Funding Fee will be 2.15%. To calculate the VA Funding Fee, we multiply $400,000 x 2.15% to get $8,600. If the Veteran chooses to finance the Funding Fee, then the total VA loan will be $408,600. **(In 28 years of closing VA loans I do not remember a case where a Veteran chose to pay the VA Funding Fee out of pocket. But it’s possible.) **

Example of Subsequent Use VA Funding Fee

If a California Veteran uses VA financing at a later time, whether to purchase a different home or to do a VA cashout refinance, he would then be subject to a 3.3% VA Funding Fee if the down payment is less than 5%. Assuming the same $400,000 purchase price, but this time for a Veteran who had used VA financing previously, the VA Funding Fee would be $13,200 and the total VA loan would be $413,200. If the Veteran had the ability to put even just 5% down to make the base loan $380,000, the VA Funding Fee would only be 1.5% $5,700. So a “move up” buyer could save on the VA Funding Fee by putting at least 5% down.

It’s important to note that when refinancing to pull cash out, the VA Funding Fee will either be 2.15% for First Time Use(2.4% for National Guard or Reserves), or 3.3% for subsequent use. The loan to value of the refinance will not help or hurt the Funding Fee calculation.

This chart below lays out what the funding fee will amount to on a VA purchase loan:

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This following chart shows you the funding fee percentage for VA cash-out refinances:

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Can the VA Funding Fee be Waived?

For those Veterans with a service connected disability and disability rating issued by VA, the Funding Fee will be waived. Whether the rating is 10% or 100%, the Funding Fee will be $0. The VA Certificate of Eligibility will verify for the lender whether a Funding Fee will be required.

VA Funding Fee on an IRRRL

The VA Interest Rate Reduction Refinance Loan, or IRRRL, is a great way for a current VA borrower to take advantage of lower interest rates. There is no income documentation and no appraisal. It is a “VA streamlined refinance“. And to make it even better, the VA Funding Fee on an IRRRL is only .5%.

Authored by Tim Storm, an Orange County VA Loan Officer specializing in VA Loan. MLO 223456. – Please contact my office at the Home Point Financial. My direct line is 949-640-3102. www.CaliforniaVALoanExpert.com. I will prepare custom VA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of the your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.

VA Funding Fee to be Lower After September 30, 2011

California Veterans using their VA Eligibility are about to get a nice surprise, as the Department of Veterans Affairs recently announced they would  lower the VA Funding Fee.  The drop will help save thousands for VA Loan borrowers in California. The typical charge for “First Time Use” currently is 2.15%. The new percentage for first Time Use will be 1.4% for loans closed on or after October 1, 2011. On a $400,000 loan, that equates to a savings of $2,800.

New VA Funding Chart | California VA Loans

Below is a chart comparing the current VA Funding Fee’s to the new Funding Fee percentages.

 

VA Funding Fee Example for Los Angeles Veteran

As an example, let’s say a retired military Veteran wants to purchase a home in Los Angeles for $650,000 with Zero Down payment. (The 2011 VA Loan Limits for Zero Down financing are $700,000.) If this is the Veterans first time using his VA eligibility to purchase a home, then his Funding Fee under the current rules would be $13,975. ($650,000 * 2.15% = $13,975). The VA Funding Fee can be financed into the loan, which is what happens on most loans. In this case, the new VA loan would be $663,975. But if the loan closes after September 30, 2011, then the new Funding Fee of 1.4% applies. The Funding Fee to be financed into the loan would be $9,100, for a total loan of $659,100. That results in a savings of $4,875.  A $9,100 charge is not bad for the ability to purchase a home with no down payment. Also remember, VA does not have a monthly Mortgage Insurance payment, like other types of “high loan to value” loan programs.

Funding Fee Waived for Disabled Veterans

Veterans who have a service related disability may have the Funding Fee waived, which can be a very big savings. The VA has to consider the Veteran to be at least 10% disabled, which is verified by the lender.

The first thing a California Veteran needs to do when considering using VA Eligibility is talk to a lender who specializes in the VA loan program. A California VA Loan Expert should be able to provide a detailed loan scenario which will break down the purchase price, loan amount, payment, and amount needed to close, if any. He should also be able to explain the difference between the CalVet loan program and the standard VA loan program. Once the Veteran knows what purchase price they can afford, it is important to get a VA loan PreApproval.