The VA funding fee is a one-time fee paid directly to the U.S. Department of Veterans Affairs, not to the lender, that sustains the VA loan guarantee program without cost to taxpayers. For a first-time VA user with zero down payment, the fee is 2.15% of the loan amount. It can be financed into the loan so no cash is needed at closing. Veterans with a service-connected disability rating of 10% or more are fully exempt.
Why the VA Funding Fee Exists
The VA loan program offers zero down payment and no private mortgage insurance, two benefits that cost the program money when loans default. The funding fee covers a portion of that risk without requiring annual premiums from borrowers. It is a one-time charge, not a recurring cost like FHA's mortgage insurance premium. The fee goes to the VA directly and funds the guarantee program that allows lenders to offer these terms in the first place.
Funding Fee Rates by Scenario
First-time VA loan use with zero down payment: 2.15%. First-time use with 5% or more down: 1.50%. First-time use with 10% or more down: 1.25%. Subsequent VA loan use with zero down: 3.30%. Subsequent use with 5%+ down: 1.50%. Subsequent use with 10%+ down: 1.25%. Cash-out refinances follow similar tiers. IRRRLs (streamline refinances) have a reduced fee of 0.50% regardless of down payment or prior use.
Who Is Exempt From the Funding Fee
Veterans with a service-connected disability rating of 10% or more are fully exempt from the funding fee. Surviving spouses receiving Dependency and Indemnity Compensation (DIC) are also exempt. Active duty service members who have received a Purple Heart are exempt. Veterans who were injured on active duty and are receiving pre-discharge disability compensation are exempt. The exemption is documented through the Certificate of Eligibility, and Dan verifies exemption status before every closing.
How the Funding Fee Is Paid
Most borrowers roll the funding fee into the loan balance rather than paying it at closing. On a $400,000 purchase with first-time use and zero down, the 2.15% fee adds $8,600 to the loan, bringing the balance to $408,600. This avoids any out-of-pocket cost at closing but slightly increases the monthly payment and total interest paid over the life of the loan. Borrowers with the cash available can pay it at closing instead, which is the lower-cost option long-term.
The Funding Fee vs FHA Mortgage Insurance
The most common comparison is between the VA funding fee and FHA's mortgage insurance premium structure. FHA charges an upfront MIP of 1.75% plus an annual MIP of approximately 0.55% paid monthly for the life of the loan on most purchases. The VA funding fee is a one-time charge with no ongoing monthly insurance cost. On a $400,000 loan, FHA's annual MIP adds roughly $183 per month indefinitely. VA's funding fee rolled in adds about $46 per month to the payment with no recurring insurance. VA is significantly cheaper over any holding period beyond about three years.
The funding fee is the most common objection I hear when veterans consider using their VA benefit. 'I have to pay 2.15%? That sounds like a lot.' Then I run the math against FHA. No monthly insurance premium on a VA loan saves the average veteran $150 to $200 per month compared to FHA. The funding fee pays for itself in 3 to 4 years. After that, every month you're ahead. For veterans with a disability rating of 10% or more, the exemption eliminates even that cost, making VA unambiguously the best mortgage product on the market for those who qualify.
Have a situation like this?
Call Dan at (661) 342-9381. He will review your specific situation in a free call.