Military Buyers: STOP Overthinking the VA Loan Funding Fee!
The VA loan is one of, if not the most, incredible financing options on the market, and yet people STILL find reasons to complain about it. I hear people complain about the VA loan funding fee all the time. Which is why I’m here to tell you that it isn’t so bad!
You talk yourself out of using the VA loan because “the funding fee is terrible” or convince yourself that you need to put money down to buy down the funding fee because it sounds terrible….but it isn’t!
I’m going to break down my thoughts on the VA loan funding fee here because I get asked this question all the time, and I realized there is a need for this breakdown to be in existence.
What is the Funding Fee?
The funding fee is essentially an origination fee (just like other lenders have). This fee is used to help keep the cost of the loan for U.S. taxpayers low. This is because the VA loan doesn’t require down payments or monthly mortgage insurance.
The funding fee is wrapped into your mortgage and paid when you close the VA home loan. This funding fee is a downside to the VA loan but isn’t that bad.
On a $200,000 property, this fee is only $4,600! Assuming you were to pay 4% interest on this loan, that funding fee could cost you a whopping $22.00/month.
In my opinion, paying $11.00/month for every $100,000 in loan amount is absolutely worth not paying the 20 percent down payment required by conventional mortgages.
VA Home Loan Funding Fee Amounts
Funding Fee Amounts for Other VA Home Loan Types
Circumstances that Waive the VA Loan Funding Fee
The most commonly known way to avoid paying the funding fee is having a VA disability rating of 10% or greater.
That being said, there are several other ways to have this fee waived. I went ahead and copied this straight off the VA.Gov website because it was the best breakdown of these options I found:
“You won’t have to pay a VA funding fee if any of the below descriptions is true. You’re:
- Receiving VA compensation for a service-connected disability, or
- Eligible to receive VA compensation for a service-connected disability, but you’re receiving retirement or active-duty pay instead, or
- The surviving spouse of a Veteran who died in service or from a service-connected disability, or who was totally disabled, and you’re receiving Dependency and Indemnity Compensation (DIC), or
- A service member with a proposed or memorandum rating, before the loan closing date, saying you’re eligible to get compensation because of a pre-discharge claim, or
- A service member on active duty who before or on the loan closing date provides evidence of having received the Purple Heart
You may be eligible for a refund of the VA funding fee if you’re later awarded VA compensation for a service-connected disability. The effective date of your VA compensation must be retroactive to before the date of your loan closing.
If you think you’re eligible for a refund, please call your VA regional loan center at 877-827-3702. We’re here Monday through Friday, 8:00 a.m. to 6:00 p.m. ET.”
Why the VA Funding Fee is Better than Using the FHA Loan
If you focus on the negative view of “but, but, the funding fee stinks,” you will somehow come to the conclusion that the FHA loan could be your better option. Let me just tell you, that is dead wrong. I got talked into using an FHA loan on my first duplex (by my lender nonetheless), and it has cost me well over $10,000 since closing on the property. The VA loan is much better! Full story here.
Mortgage Insurance Premium
The FHA loan requires that you pay a mortgage insurance premium (MIP), which is 1.75% of your loan amount.
Right off the bat on our $200,000 home example, this is $3,500. Keep in mind the VA loan funding fee is not charged upfront. Rather, it is added into the loan and paid down over the course of the loan.
Private Mortgage Insurance
To make matters worse, private mortgage insurance (PMI) is added to the FHA loan as a sort of ongoing mortgage insurance premium. This PMI ranges from 0.45% to 1.05% of your original mortgage amount, depending on the amount of your loan. This amount is then divided by 12, and that amount is added to your monthly payment.
On our $200,000 home, the PMI would be 0.8% or $1,600 annually. On this loan, PMI would equate to around $133.33 per month added on to the loan payment.
Okay, here is a short, down and dirty comparison of the difference between the funding fees of the VA loan and the MIP/PMI payments of the FHA loan on our $200,000 home purchase example.
With the VA loan, the funding fee is wrapped into the mortgage. You would pay $0.00 upfront and roughly $22/month for the duration of the loan, totaling $4,600 over the course of the loan.
With the FHA loan, you would pay the $3,500 MIP at closing and then be responsible for paying $133.33/month in PMI for the duration of the loan. After just one year of ownership with the FHA loan, you would have paid $5,100 between the MIP/PMI and still be paying $1,600 a year in PMI expenses.
Oh, and by the way…try to convince your lender to waive the MIP and PMI expenses on an FHA loan because you have a VA disability rating of at least 10%. Let me know how that works out for you. The only way to get rid of the MIP/PMI expenses is to put down more money than you want to. If you intended to put 20% down, you probably wouldn’t be using either of these loan options.
Again, the funding fee isn’t that bad. The VA loan is an incredible benefit for service members!
Why you shouldn’t worry about the funding fee!
The bottom line is this: the funding fee does cost you a little bit of money. The VA funding fee does get wrapped into your mortgage. Yes, it might mean the VA loan isn’t the perfect, zero down loan.
It doesn’t, however, ruin the VA loan. I hear negative people comment about “oh, but the funding fee sucks” all the time. The reality is that the funding fee is substantially better than what you would pay on other affordable primary occupancy loans. Personally, if I were to buy our $200,000 example house, I would much rather pay $22/month than have to cough up $40,000 as a down payment.
I say that without even going into the concept of opportunity cost and the present value of money. If you have the money for that $40,000 down payment, you can stick it in a crummy savings account. As long as you earn 0.0066% interest, you would earn enough interest to cover the funding fee cost. You can invest $40,000 almost anywhere and receive more than a 0.0066% return on investment. This is exactly why you shouldn’t complain about the funding fee. It is chump change—who cares!
*Disclaimer* I’m not licensed in any capacity to work with mortgages; I just do my homework. Also, I did this math on a desktop calculator so the numbers may not be perfect. I would apologize, but my drill instructors told me not to, and you get the idea. Also, these fees change from time to time, but I will update the percentages when they change.
Also, if you want help finding a vetted VA lender and/or realtor who understands the VA loan, We’ve got your six here!