What is the VA funding fee? Cost and exemptions explained

Key takeaways 

• Most VA borrowers pay a one‑time upfront charge at closing, but some service members, veterans and surviving spouses qualify to skip it altogether.  
• The amount varies by loan type and usage, with lower rates for larger down payments and the lowest rate reserved for streamline refinances.  
• Even with the upfront charge, VA loans can be more affordable than conventional mortgages because they require no down payment and no monthly mortgage insurance. 

The VA home loan program allows eligible service members and veterans to buy a home with no down payment and no requirement for mortgage insurance, often at competitive interest rates.

Those benefits come with a tradeoff. Most borrowers must pay a one-time upfront charge, known as the VA funding fee, when the loan closes.

Understanding how the funding fee works, including how much it can be and how it is paid, can help buyers budget for a purchase and better assess the total cost of a VA-backed mortgage.

The VA funding fee is paid to the Department of Veterans Affairs at closing. It typically ranges from 0.5% to 3.3% of the loan amount, depending on factors such as the borrower’s down payment and whether the benefit has been used before.

VA loans are guaranteed by the federal government, which agrees to reimburse lenders for part of their losses if a borrower defaults. The funding fee helps offset that risk, reducing costs that would otherwise fall to taxpayers.

The charge also allows eligible borrowers to access zero-down financing and competitive rates without paying monthly mortgage insurance, said Shirley Mueller, senior vice president of mortgage lending at CrossCountry Mortgage and founder of VA Loans Texas in Austin, Texas.

For home purchases and new construction, the fee is based largely on the size of the down payment and whether the borrower has previously used a VA loan. Putting more money down upfront can lower the percentage charged.

For example, a borrower purchasing a $300,000 home would pay the following amounts:

VA borrowers can refinance an existing mortgage in two main ways: a cash‑out refinance or an Interest Rate Reduction Refinance Loan, commonly called an IRRRL or streamline refinance.

An IRRRL is a option available only to borrowers who already have a VA‑backed loan. It is intended to lower an interest rate or adjust loan terms, such as switching from an adjustable to a fixed rate, and typically requires less paperwork and no appraisal. Borrowers cannot take cash out with this type of refinance.

A cash‑out refinance, by contrast, replaces the existing mortgage with a larger loan, allowing borrowers to tap their home equity for cash.

Under Department of Veterans Affairs guidelines, the upfront charge on a cash‑out refinance is higher than on a streamline refinance, which carries a flat 0.5% rate, according to the VA.

The streamlined option carries the lowest rate and is often used by homeowners looking to reduce monthly payments rather than access equity.

VA funding fees often cost thousands of dollars. If you’d rather not pay such a large sum upfront, you can finance the funding fee by adding it to your loan amount. This means you’ll pay interest on the fee, increasing your monthly payments and the overall cost of your mortgage.

If you have enough cash to pay the full VA loan funding fee upfront, you can include it in your closing costs. When you choose this option, you’ll settle the entire amount at closing.

Buyers may ask sellers to cover the fee as part of the negotiations. However, they may counter your offer, especially if you’re in a seller’s market. Your real estate agent can help you decide the best strategy for negotiating concessions.

Keep in mind that there are specific rules for VA loans. Seller concessions — including the funding fee — cannot exceed 4% of the loan amount.

Borrowers don’t have to pay the charge if they fall into one of these groups:

• Veterans receiving compensation for a service‑connected disability 
• Veterans who qualify for disability compensation but receive retirement or active‑duty pay instead 
• Surviving spouses who receive Dependency and Indemnity Compensation (DIC) 
• Active‑duty service members who have received the Purple Heart 
• Service members with a pending pre‑discharge disability claim that qualifies for compensation 

Unlike conventional loans, VA loans do not require a down payment or private mortgage insurance. Conventional borrowers typically must buy private mortgage insurance, or PMI, when putting down less than 20%.

While the VA charge may feel similar to private mortgage insurance, the two differ:

• The VA charge is paid once. PMI is a recurring monthly cost until sufficient equity is built. 
• PMI protects the lender, while the VA charge helps sustain the loan program and eliminates the need for mortgage insurance. 

Even when financed, the VA charge is often less expensive than paying private mortgage insurance over several years.

For many borrowers, the benefits outweigh the upfront cost. No down payment lowers the barrier to entry, and interest rates are often competitive with or below conventional options.

Credit standards may also be more flexible. The VA does not set a minimum score, leaving decisions to lenders. Many look for a credit score around 620, though some accept lower.

Borrowers looking to minimize the charge can consider:

• Making a larger down payment, which moves the loan into a lower tier 
• Refinancing with an IRRRL, which carries a flat 0.5% rate 
• Negotiating seller concessions to cover some or all of the amount 

This story was updated on May 5.