VA funding fee

The VA funding fee is a one-time fee charged at closing on VA loans, paid in lieu of monthly mortgage insurance. The amount varies from 1.25% to 3.30% of the loan, depending on the borrower's service category, down payment, and whether it's the first time using a VA loan. Most borrowers roll the funding fee into the financed loan rather than paying it in cash.

How it works: the fee schedule has a few axes. First-time use with no down payment runs 2.15% for regular military or 2.40% for Reserve and National Guard (the 2.40% rate applies to loans from before the August 2018 fee equalization). First-time use with a 5%+ down payment drops to 1.50%. With a 10%+ down payment, it drops further to 1.25%. Subsequent VA loan use raises the fee, 3.30% with no down payment, scaling down with larger down payments.

Why it matters: the funding fee is the cost VA borrowers pay in exchange for no monthly mortgage insurance. Over the life of the loan, the funding fee is usually meaningfully cheaper than the monthly MI charged on FHA or conventional loans with comparable down payment, which is why VA loans tend to produce lower monthly costs than the alternatives for borrowers who qualify.

Common gotcha: the funding fee is waived entirely for veterans receiving compensation for service-connected disabilities, surviving spouses of veterans who died in service or from service-connected causes, Purple Heart recipients on active duty, and certain other categories. Eligible borrowers should confirm waiver status before closing, the savings can run into many thousands of dollars on a typical purchase.