What Is a VA Funding Fee and Why Does It Matter?

The funding fee percentage is determined by the following:

• Type of Loan: Purchase, cash-out refinance, or interest rate reduction refinance loans (IRRRLs).
• Down Payment: Borrowers making a down payment of 5% or more receive a reduced funding fee.
• First-Time or Subsequent Use: First-time VA Loan users typically pay a lower fee than those using the benefit for a second or subsequent time.

Here’s a breakdown of the current VA funding fee rates for purchases and refinances as of 2025:

For an Interest Rate Reduction Refinance Loan (IRRRL), the funding fee is set at 0.5%, regardless of prior use.

Consult the VA’s official funding fee chart for the most up-to-date rates.

Certain borrowers are exempt from paying the VA funding fee. This includes:

• Veterans receiving compensation for a service-connected disability.
• Surviving spouses of veterans who died in service or from a service-connected disability.
• Active-duty service members with a Purple Heart award.

To qualify for an exemption, borrowers must provide supporting documentation, such as a VA disability award letter or proof of the Purple Heart. 

The VA funding fee is critical  in maintaining the VA Loan program’s benefits and accessibility. Here are some key reasons why it matters:

1. Ensuring Program Sustainability

The VA Loan program operates without requiring taxpayers to cover its costs. The funding fee generates revenue to sustain the program, allowing it to continue providing benefits to future generations of veterans and active-duty service members.

2. Eliminating the Need for Private Mortgage Insurance

One of the standout features of VA Loans is that they do not require PMI, even with no down payment. The VA funding fee helps offset the risk associated with offering loans under these favorable terms, making homeownership more affordable for eligible borrowers.

3. Encouraging Financial Responsibility

Borrowers who can make a down payment benefit from a reduced funding fee. This structure incentivizes financial preparedness and rewards those who can contribute upfront.

Borrowers have two options for paying the VA funding fee:

• Upfront Payment: The fee can be paid in full at closing.
• Financing the Fee: Borrowers can roll the funding fee into the total loan amount, spreading the cost over the life of the loan.

While financing the fee adds to the loan balance and increases monthly payments, it allows borrowers to avoid a large upfront cost, making homeownership accessible even to those with limited savings.

Let’s consider a couple of scenarios to illustrate how the VA funding fee works in practice:

Scenario 1: First-Time VA Loan User with No Down Payment

• Home price: $300,000
• Down payment: $0
• Funding fee: 2.15% of $300,000 = $6,450

If the borrower opts to finance the fee, their total loan amount becomes $306,450.

Scenario 2: Subsequent VA Loan User with a 5% Down Payment

• Home price: $300,000
• Down payment: $15,000 (5%)
• Funding fee: 1.5% of $285,000 = $4,275

In this case, the borrower’s loan amount is reduced by their down payment, leading to a lower funding fee.

While the funding fee is generally non-negotiable, there are circumstances where it can be waived or refunded:

• Waived for Exempt Borrowers: Eligible borrowers do not pay the funding fee, as outlined above.
• Refunded in Case of Retroactive Exemption: If a borrower’s disability claim is approved after closing, making them eligible for a funding fee exemption, they may receive a refund. Borrowers should contact their lender or the VA to initiate the refund process.

It’s essential to distinguish the VA funding fee from other closing costs associated with buying a home. While the funding fee is specific to VA Loans and directly supports the program, closing costs cover various expenses, including:

• Loan origination fees
• Title insurance
• Appraisal fees
• Taxes

Understanding this distinction can help borrowers better plan their finances when purchasing a home.

Pros:

1. Sustains the VA Loan Program: Ensures future generations of veterans can benefit from the program.
2. No PMI requirement: Helps borrowers save money over the life of the loan.
3. Flexible payment options: Allows borrowers to choose between upfront payment and financing the fee.

Cons:

1. Increases loan costs: Financing the fee adds to the total loan amount and monthly payments.
2. May surprise first-time borrowers: Those unfamiliar with the fee may find it unexpected.
3. Non-negotiable: Most borrowers must pay the fee unless they qualify for an exemption.