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What is the upfront funding fee for a VA loan?

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Nice houseIf you're a vet, and you've searched the internet for information on a VA loan, undoubtedly, you have come across web sites talking about a VA funding fee. So what is it? Here's a layman's explanation of the VA funding fee.

All eligible veterans (except service related disabled veterans) are required to pay a funding fee to the Veteran's administration as a requirement for a VA mortgage. Think of the funding fee as a cost or "fee".

The cost of the funding fee depends on the service eligibility (i.e. active duty, reservist, national guard), down payment (if any), and whether you have obtained a VA mortgage in the past.

You'll notice that the VA funding fee is a little bit higher for the Reservist and National Guard vet. Notice that the funding fee goes down with a higher down payment and surprisingly, the fee is higher if you reuse your eligibility (i.e. buy another house with a VA loan). Go figure?

Here's a chart of the "new VA funding fee" percentages as of October 1, 2011. You can calculate the VA funding fee with the VA loan calculator.

VA funding fee chart

Purchase - First Time Use
Down Payment Active Duty/Retired Guard/Reserve
$0 Down 2.15% 2.40%
5-10% Down 1.50% 1.75%
10% or More 1.25% 1.50%

Purchase - Additional Use
Down Payment Active Duty/Retired Guard/Reserve
$0 Down 3.30% 3.30%
5-10% Down 1.50% 1.75%
10% or More 1.25% 1.50%

Cash Out Refinance
VA Usage Active Duty/Retired Guard/Reserve
1st Time Use 2.15% 2.40%
Additional Use 3.30% 3.30%

IRRL (Interest Rate Reduction Loan)
VA Usage Active Duty/Retired Guard/Reserve
1st Time Use 0.50% 0.50%
Additional Use 0.50% 0.50%

OK, so what is it?

Every vet is required to finance their appropriate funding fee percentage into the mortgage (except disabled vets). Here's the calculation:

Sales Price = $100,000
Less down payment (if zero) = $0
Loan Amount = $100,000.00

Now multiply the mortgage amount by the VA funding fee percentage. For this example, we'll assume zero down payment and the veteran earned his or her eligibility as an active duty (regular military) veteran; and no down payment. Multiply the mortgage amount X funding fee percentage:

Loan Amount = $100,000
X VA funding fee percentage 1.40% $1,400.00
Final Loan Amount = $101,400.00

The funding fee is added in. You're mortgage payment will be based on the Final Loan Amount of $101,400
So where does the funding fee go and why do I have to pay it?

How does a VA mortgage loan work?

You obtain a VA mortgage through an approved bank or mortgage lender. You make application to the lender for the VA loan and the bank pays the seller at closing and you pay back the bank. The bank sends the funding fee to the VA. Once again, all vets with the exception of disabled vets pay the funding fee.

So now the Veterans Administration has a pot of money from all the funding fees. But every now and then a vet is foreclosed on. The bank loses money. So the bank seeks reimbursement from the Veteran's Administration for the loss. And guess where the money comes from? You guessed it . . . from the pot of funding fees!
House is foreclosed by bank

VA reimburses the bank. The Veteran's Administration takes title to the house and the VA sells the house. So how much is the funding fee costing me?

Remember, the VA funding fee is included in the loan amount, you borrow $100,000, and the funding fee is added in. So how much is that $1,400 increasing my payment? Good question, here's the answer:

Funding Fee =  $1,400
Term 30 Years
3% - Interest Rate $5.90 - per month
4% - Interest Rate $6.68 - per month
5% - Interest Rate $7.52- per month
6% - Interest Rate $8.39- per month

So the funding fee is protecting the bank?

Yep, and for good reason. The mortgage money comes from the bank - not the VA. Banks don't like to lose money, you know that. So why would any bank offer a mortgage with no down payment, 100% financing, and allow the seller to pay all of the closing costs, unless, the Veteran's Administration guarantees the loan. The VA program works! Did you ever hear of the VA loan program being in trouble? I haven't, the program works! Perhaps if all mortgages follow the VA mortgage guidelines, the mortgage crisis could have been minimized