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VA Loan Down Payment and Funding Fee Issues

Updated December 5, 2018

While it's true that VA borrowers eligible for a no-down payment VA loan can save money up front, some buyers may choose to make a down payment to reduce the cost of the loan over its lifetime and pay a smaller VA loan funding fee.

VA Funding Fee Exemptions

About one-third of VA loan borrowers do not pay the VA funding fee. The VA loan program excludes service members and veterans who receive compensation for a service-connected disability from paying the VA funding fee. If a pre-discharge exam or review determines a veteran is eligible for at least 10% disability compensation, then he or she is exempt from the fee. Surviving spouses also need not pay the fee.

Disability ratings can come after a borrower closes their VA loan, in which case it’s possible to receive a refund for VA funding fee. Sometimes lenders close loans before they can verify a borrower’s VA funding fee exemption status. Often, borrowers have pending disability claims when they close their loan, or they seek a disability rating after loan closing.

When any of those situations arise, the VA advises lenders to complete the loan process as if the borrower is not exempt from paying the fee. Lenders can tell the VA that the borrower should be exempt, and then the VA must make a decision on the borrower’s disability status. Buyers can seek a refund through their mortgage lender or servicer.

VA Funding Fees by Borrower Type

At the time of this writing, first-time, regular military personnel with no down payment pay a VA loan funding fee of 2.15 percent for purchase loans. But these borrowers who put down 10 percent of the loan pay only 1.5 percent toward the fee. A down payment of more than 10 percent reduces the VA funding fee to 1.25 percent.

Reservists and National Guard members pay funding fees of 2.4 percent for no down payment; 1.75 percent for down payments between 5 and 10 percent; and 1.5 percent for down payments of 10 percent or higher.

First-time VA Cash-Out refinances come with 2.15 percent VA funding fees for regular military personnel, and 2.4 percent for Reservists and National Guard members. All VA funding fees are 3.3 percent for subsequent VA loans with no down payment, and for subsequent refinances.

The funding fee for a VA Streamline refinance is 0.5 percent.


Paying the VA Funding Fee and Refunds

Borrowers do have the option of rolling the VA loan funding fee into the cost of the loan, avoiding the initial financial burden of paying the fee in total upfront. However, by doing so the long-term cost of the VA mortgage is higher. The suitable option depends greatly on your short- and long-term financial goals, ability to afford a down payment and pay the VA loan funding fee at the same time.

For borrowers who closed on their home before receiving a disability rating, refunds are possible. You’ll need a claim that entitles you to disability-connected compensation retroactively to before your loan closed. VA funding fee refunds are awarded based on how they’re paid. Borrowers who paid cash will receive cash. When the VA funding fee is rolled into the monthly balance, the lender then applies the overpayment to the VA loan balance.

Making a down payment to shrink the funding fee is an option, but it’s typically one worth discussing with your VA loan lender and real estate agent.

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