One of the incredible benefits of military service is the ability to purchase a home with one of the only no-payment down loan programs available. VA loans are generally more lenient than conventional loans in terms of credit and income, and the Veterans Administrations caps what veterans pay in fees and costs. That being said, there is still a unique cost associated with VA loans: VA Funding Fees.
WHAT IS A FUNDING FEE AND WHY DO I HAVE TO PAY IT?
Because there is no down payment and no monthly mortgage insurance required for VA Loans, a funding fee is required at the closing of the loan. This fee reduces the loan's cost to taxpayers should the loan go into default.
HOW MUCH IS THE FUNDING FEE?
The funding fee represents a percentage of your loan and varies based on four criteria:
1. The type of loan you are taking out, such as a streamline (IRRL) or cash-out.
2. Your military category and nature of service (regular, Reserves, or National Guard)
3. Whether or not you are a first-time or second-time loan user (you qualify to use your VA eligibility for two loans in your lifetime, and the second usage has a higher fee associated)
4. Whether or not you choose to make the optional down payment.
Regular military members pay slightly lower funding fees than Reservists and National Guard members, but the total cost falls somewhere between 1.25 percent (with a 10% down payment) to 3.3 percent (the highest amount representing a Reservist using his second VA loan with no down payment).
CAN I ROLL MY FUNDING FEE INTO MY VA LOAN?
Yes. And most choose to do so rather than pay cash at the time of closing. For the most part, this adds about $30 extra per month on to the life of your 25 year loan.
The only caveat of rolling your fee into the loan is that it may result in a situation in which you owe more than the fair market value of the home, which can reduce the benefit of a possible refinance in the future or make it difficult to sell a home if you can't recoup the cost of the loan balance. If you are looking to buy at the very top of your pre-approved loan amount, talk to your mortgage lender about whether or not you should roll your funding fee into your loan or not.
IS ANYONE EXEMPT FROM THE VA FUNDING FEE?
Yes. You are exempt if you are:
- Considered at least 10% disabled
- Are receiving compensation for a service-connected disability, or
- would be entitled to receive compensation for disability if you did not receive retirement or active duty pay
- OR are a surviving spouse of a Veteran who died in service or from a service-connected disability.
DOES THE VETERANS ADMINISTRATION SET THE INTEREST RATE OF MY LOAN?
No. The lender, not VA, sets the interest rate, discount points, and closing costs. These will vary from lender to lender, so consider using a mortgage broker like those at Patriot Home Mortgage Pacific Group who have the ability to compare costs and rates between 40 lenders.
Also know that there may be additional fees attached to your loan which are associated with your lending company and broker compensation and not tied to the VA.
Closing costs such as the VA appraisal, credit report, state and local taxes, and recording fees may be paid by the purchaser, seller, or shared. The seller is also allowed to pay for some closing costs as incentive to buy, but they can't exceed 4% of the total loan.
If you are a Veteran looking toward first time home ownership, purchasing another home, refinancing, utilizing your second loan qualification, or qualifying for a cash-out loan, contact us today and let's talk. We specialize in VA loans and helping servicemen and women reach their home ownership goals!