The VA streamline option, more formally known as the VA Interest Rate Reduction Refinance Loan (IRRRL), is the most popular loan option for veterans, but one thing that makes people hesitate to do one is the VA funding fee. It sounds expensive and intimidating, but it really isn’t. And the benefits far outweigh the cost. The VA IRRRL funding fee is set in place to provide the benefits that go into a VA loan. The funding fee also safeguards veterans against having to pay a down payment or monthly mortgage insurance. If you choose to do a VA streamline loan, you’ll notice the VA funding fee listed among the closing costs. This article will take you through what that fee is, who pays it, and why.
What Is the VA Funding Fee and How Does It Work?
With most home loans out there, you have to pay mortgage insurance. This insurance helps the lender if you are ever in a situation where you can no longer make payments. However, mortgage insurance is not required for VA home loans. Part of the reason why is because the Department of Veterans Affairs (VA) insures the loan, offering a lot of protection for the lender and thereby lowering risk. However, in order for the VA to keep funding home loans, they have to have some sort of income to cover the loans of borrowers who cannot repay their loans. So, this is where the VA funding fee comes in.
The VA funding fee is a charge the borrower must pay at the closing of their loan (or it can be rolled into the loan amount). It is a one-time fee and is charged based on a percentage of the borrower’s loan. This percentage varies depending on the veteran’s type of service, length of service, and percentage of disability. Like I said above, this fee is paid to the VA, not to the lender, which is a very important distinction to note. Many critics of the VA home loan program believe that the funding fee is too expensive and this cost outweighs the benefits. However, these individuals are overlooking the fact that mortgage insurance often costs much more than the VA funding fee. So in fact, the benefits of a VA loan far outweigh the cost of the fee.
How Much Is the VA IRRRL Funding Fee?
For IRRRLs, the funding fee is 0.5 percent of the principal loan amount, according to the most recent VA IRRRL funding fee chart.
Veterans can choose to pay the fee in cash or finance it as part of the loan itself. All veterans taking advantage of the VA Home Loan Guaranty benefit are expected to pay the funding fee. However, there are a few cases in which a veteran may qualify for exempt status.
As you can see from the charts included below, the funding fee for the IRRRL is significantly lower than for any other loan type. This is just further incentive to refinance with an IRRRL if you have the opportunity to do so.
VA Funding Fee Chart
There’s no need to worry over how much the funding fee will be and whether or not you can cover it. Find out how much you’ll likely be charged for this fee by looking at the VA funding fee table below.
VA IRRRL
Time of VA Use | Fee Amount |
First-Time Use | 0.5% |
Additional Use | 0.5% |
Cash-Out Refinance
Time of VA Use | Fee Amount |
First-Time Use | 2.3% |
Additional Use | 3.6% |
Purchase Loans (When Used for the First Time)
Down Payment Amount | Fee Amount |
< 5% | 2.3% |
5% to < 10% | 1.65% |
10% or more | 1.4% |
Purchase Loans (When Used for an Additional Time)
Down Payment Amount | Fee Amount |
0% | 3.6% |
5 to 10% | 1.65% |
10% or more | 1.4% |
VA Funding Fee Exemptions
According to the Department of Veterans Affairs, veterans who’ve sustained a service-related disability and receive VA compensation qualify for a VA IRRRL funding fee exemption. Additionally, if you’re a veteran receiving retirement pay who otherwise would be entitled to VA compensation for a service-related disability, you also qualify for exempt status.
Other exempt persons include those who received a VA disability award after taking a pre-discharge exam and those who would have received a VA disability award had they not been recalled to active duty. Surviving spouses are also exempt from the funding fee if death occurred in service or as a result of a service-related disability.
Is the Fee Refundable?
If you sustained a service-related disability but your disability reward was pending at the time of closing, you may qualify for a VA IRRRL funding fee refund. If this is the case, note that it’s your responsibility to contact the VA or your loan lender and request that the fee be refunded.
According to the VA, the fee will be refunded according to the manner in which it was paid. So if the fee was paid in cash, the fee amount would be returned in cash. If the fee was financed into the loan, the refund will be extracted from the loan balance. You may also qualify for a refund if the fee was overcharged.
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