What the VA funding fee is
The VA funding fee is a one-time charge required on most VA-backed home loans, established under 38 U.S.C. § 3729. Per VA: "This fee helps to lower the cost of the loan for U.S. taxpayers since the VA home loan program doesn't require down payments or monthly mortgage insurance." In effect, the fee funds the VA Loan Guaranty Program so future veterans can also borrow.
The fee varies by loan type, by whether this is your first VA loan or a subsequent use, and (for purchase loans) by down payment percentage. It may be paid in cash at closing or financed into the loan, raising your loan amount and monthly payment slightly.
Exemptions — when you owe zero
Under 38 USC § 3729(c), the funding fee is waived if any of these apply at closing:
- Receiving VA compensation for a service-connected disability (a compensable rating — 10% or higher)
- Eligible for compensation but receiving retirement or active-duty pay instead
- Surviving spouse receiving Dependency and Indemnity Compensation (DIC)
- Pre-approved disability — proposed or memorandum rating issued by VA before closing showing eligibility for compensation
- Active-duty Purple Heart recipient who provides evidence of the award by closing date
Veterans with even a 10% service-connected rating receive VA compensation and are exempt. If your disability claim is still pending at closing, you pay the fee — but a later retroactive award can make it refundable (see the refund section below).
First use vs. subsequent use
The first VA loan you take uses the lower "first use" rate (1.25%–2.15% on purchase depending on down payment). The second and later loans — even on different homes — use the higher "subsequent use" rate, which jumps to 3.3%for purchases with less than 5% down.
Restoring your entitlement does not restore first-use pricing. Paying off the prior VA loan, selling the home, or using the one-time restoration gives your guaranty entitlement back so you can borrow again — but it does not change your funding-fee tier. Under 38 USC § 3729(b)(4)(D)(i) a loan is an "initial loan" only if the veteran "has never obtained" a loan guaranteed under § 3710 or made under § 3711, so every VA loan after your first is priced at the subsequent-use rate.
What that costs: on a $350,000 purchase with less than 5% down, subsequent use is 3.3% = $11,550 versus 2.15% = $7,525 at first use — $4,025 more. Leave the "First VA loan use" box unchecked if you have ever had a VA-backed purchase or VA direct loan, no matter how much entitlement you have available today. The higher rate only bites below 5% down: at 5% or more both tiers are 1.5%, and at 10% or more both are 1.25%.
Two narrow exceptions. VA states that "if you used a VA-backed or VA direct home loan to purchase only a manufactured home in the past, you'll still pay the first-time funding fee." And under 38 USC § 3729(b)(4)(D)(ii), if the dwelling securing your prior VA loan was substantially damaged or destroyed by a major disaster declared by the President under the Stafford Act, VA treats your next loan as an initial loan if it is made within three years of the damage and is only for repairs or construction of that dwelling. IRRRLs, assumptions, Native American Direct Loans, and manufactured-home loans carry their own flat rates, so first-vs-subsequent pricing does not apply to them. Verify your entitlement status at va.gov or by requesting a Certificate of Eligibility from VA.
Financing the fee vs paying cash
You can finance the funding fee into the loan (raises your loan balance by the fee amount) or pay it in cash at closing. The numbers:
- Financed: Lower out-of-pocket at closing, but you'll pay interest on the fee for 30 years. At a 6.5–7% rate held to term, you repay roughly 2.3–2.4× the fee over the life of the loan — about 1.3–1.4× the fee in added interest.
- Cash at closing: Higher out-of-pocket now, no interest on the fee, lower monthly payment.
If you have closing-cost cash available, paying the fee outright usually wins on lifetime cost. If cash is tight, financing the fee preserves liquidity for moving expenses and reserves.
Refundability — get money back if a disability award is retroactive
Per VA: you may be eligible for a refund of the funding fee if you are later awarded VA compensation for a service-connected disability and the effective date of that compensation is retroactive to before your loan closing date. Contact your lender or the VA Regional Loan Center at (877) 827-3702 to request the refund.
VA loan vs FHA vs conventional — fee comparison
For a $350,000 purchase with low down payment:
- VA loan, 0% down, first use: $350,000 × 2.15% = $7,525 funding fee, no monthly mortgage insurance ever.
- FHA loan, 3.5% down ($337,750 base loan): 1.75% upfront MIP ($5,911) + annual MIP of 0.55% for the life of the loan when down payment is under 10% — about $155/month at the starting balance (HUD Mortgagee Letter 2023-05).
- Conventional, 5% down: no upfront government fee, but monthly private mortgage insurance — priced by the insurer based on credit score and down payment — until cancellation at 80% LTV on request or automatic termination at 78% LTV (Homeowners Protection Act, 12 USC § 4902).
Because the VA fee is one-time and VA loans never carry monthly mortgage insurance, VA financing generally has the lowest total cost of the three at low down payments. For exempt veterans there is no fee at all.