homeownership

Establishing good credit takes time, and The U.S. Department of Veterans Affairs (VA) loan program is designed to help our service members and veterans achieve homeownership. With a government-insured VA home loan, eligible service members, veterans and their families can enjoy low interest rates and no down payments on qualified mortgages, while also eliminating the need to purchase private mortgage insurance (PMI). However, the VA loan program cannot exist without support. To help cover costs associated with insuring their mortgages, VA loan borrowers may be required to pay the VA funding fee. What Is a VA Funding Fee? The VA funding fee is a one-time administrative charge paid to the Department of Veterans Affairs. Due at the time the loan closes, this fee supports the VA loan guaranty program, helping VA mortgages remain low-cost and available to help future veterans attain homeownership. With support from the VA funding fee, lenders are able to provide service members or their survivors with some of the best rates and loan terms available. Although the VA funding fee is an additional expense and should not be overlooked, those who qualify often discover that the increased savings over the life of the VA loan make up for the amount paid upfront. In other words, eligible veterans and family members usually end up saving more on a VA loan than they would with a conventional mortgage. Still, there are some considerations to be familiar with before committing to a VA loan. What Is VA Funding Fee vs. Mortgage Insurance? Although the VA funding fee is sometimes called VA loan private mortgage insurance or VA loan mortgage insurance, it actually differs slightly from traditional PMI solutions. The VA funding fee is essentially a one-time service charge that is either paid in full at closing or may be financed into the loan to be paid off over time (allowing for no-money-down loans). This charge eliminates the need to purchase PMI. That said, VA loans are the only loans that include a funding fee, and the VA funding fee can be a significant expense. As such, veterans and family members who can pay at least 20% of the loan as their down payment may discover that a conventional loan is the better option — by paying 20% they can avoid buying PMI insurance and the VA funding fee. How Much Is the VA Funding Fee? As previously mentioned, a VA loan is one of the few zero-down options available for a home mortgage. By rolling the cost of the VA funding fee into the loan’s monthly payments, borrowers can effectively purchase a property without needing any cash in hand at the time of closing. On the other hand, paying more upfront as a down payment does have its benefits. The VA funding fee is determined as a percentage of the total loan. Without making any down payment, or by making a down payment of less than 5% of the total loan amount, first-time VA loan users in 2022 pay an additional 2.3% to the VA funding fee (and subsequent VA loan users pay 3.6%). However, by paying at least 5% of the loan total as a down payment, VA loan users only pay 1.65% of the VA funding fee. For those who are able to pay at least 10% of the loan total at the time of closing, the VA funding fee drops to 1.4%. The VA funding fee applies only to the loan amount, not the purchase price of the home. So, a first-time VA loan borrower on a $300,000 mortgage with no down payment will pay a VA funding fee of 2.3% of the loan total, or $6,900. A borrower on the same loan making a 10% down payment would only have to pay $4,950 as their VA funding fee. Other factors may also impact the amount paid towards the VA funding fee, including the loan type. For a VA Interest Rate Reduction Refinance Loan (VA IRRRL), the VA funding fee is 0.5% unless the borrower is otherwise exempt. For a VA cash-out refinance, the VA funding fee is 2.3% for first-time users and 3.6% for subsequent users. VA Funding Fee Exemptions Some veterans are not required to pay the VA funding fee. Exemptions include: Recipients of the Purple Heart Veterans who qualify for compensation for service-connected disabilities, or would qualify if they didn’t receive retirement pay Veterans who qualify for compensation based on a pre-discharge exam or review Veterans who would qualify for compensation but are not receiving it due to being on active duty Surviving spouses who are eligible for VA loans. In situations where the borrower’s exemption status is not entirely clear, the Department of Veterans Affairs makes the final decision on funding fee exceptions. Who Is Eligible for a VA Funding Fee Refund? If exemption status is not confirmed before closing the loan, lenders are required to collect the VA funding fee — although a refund on the fee may be issued if exemption status is confirmed after the loan closes. In these cases, the effective date of the borrower’s VA compensation must be retroactive before the loan’s closing date. VA loans that are closed before the effective date of VA compensation are not eligible for refunds. Is a VA Loan Right for You? When weighing your mortgage options, there are many factors for you to consider. The VA funding fee may represent a major additional expense on VA loans. Even so, many veterans and their families find that VA loans are their best option despite the additional charge. If you’re a service member, former service member, or the surviving spouse of a service member, you may qualify for a VA loan. Contact a Pennymac loan expert today to learn more and see if a VA loan is right for you.