There are many reasons why a home loan guaranteed by the Department of Veterans Affairs (VA) might be a good choice for your next home purchase: no required down payment or private mortgage insurance (PMI), slightly more lenient income requirements, and generally excellent interest rates. Still, VA guaranteed loans are not always the best choice, and the difference is typically found in the funding fees.
VA funding fees are a cost added to the loan. Many buyers have their funding fee rolled into their mortgage, which is a nice option, but it isn't ideal, particularly for loans that have little to no down payment. Rolling the funding fee into a no down payment loan puts the homeowner underwater before they even move into the home.
Who Pays The Funding Fee?
Most VA guaranteed home loan borrowers will pay a VA funding fee. The following three groups are exempt:
- Veteran receiving VA compensation for a service-connected disability, OR
- Veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay, OR
- Surviving spouse of a veteran who died in service or from a service-connected disability.
If the veteran has a pending VA claim at the time of the mortgage, and is subsequently found eligible for compensation, the previously paid funding fee may be refunded.
How Much Is the Funding Fee?
The amount of the funding fee varies depending on whether it is the first time you have used your VA guarantee entitlement, your military status, the type of loan, the amount of down payment, and, for refinances, whether you receive cash back from the transaction. The official VA chart can be found here.
The most important thing about the funding fee is that you have to include it when you calculate which loan is better for you. In many cases, borrowers who are well qualified for a conventional loan, with a large enough down payment to avoid PMI, may find that the total costs of the VA loan are higher than the conventional loan. There is no single right answer, but be sure you're factoring all the costs when making a decision.
