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 reduces the loan's cost to taxpayers considering that a VA loan requires no down payment and has no 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 — most commonly — 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 (any rating > 0%)
- 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 are exempt. Many newly transitioning veterans fail to claim this — file your VA disability claim before closing if possible.
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.
Restoration of full entitlement (returning to "first use" rates) requires paying off the prior VA loan AND requesting a one-time entitlement restoration through VA. After restoration, your next loan resets to first-use pricing. 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. Typical extra cost over the life of the loan = 1.5–2× the original fee.
- 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 disability claim approves later
If you paid the funding fee at closing AND a VA disability claim was pending at the time, you may be entitled to a refund when the claim is approved retroactively to (or before) the closing date. Contact your lender or VA Regional Loan Center at (877) 827-3702 to request the refund.
The same applies to surviving spouses who become entitled to DIC after closing — refund of fee paid at closing.
VA loan vs FHA vs conventional — fee comparison
For a $350,000 purchase with low down payment:
- VA loan, 0% down, first use: $350k × 2.15% = $7,525 funding fee, no monthly PMI ever.
- FHA loan, 3.5% down: 1.75% upfront ($6,125) + monthly MIP at 0.55% annually for the life of the loan (typically $160/mo on $350k).
- Conventional, 5% down: no upfront fee, but monthly PMI ~0.5–1.5% annually until you reach 20% equity (typically $145–$435/mo).
VA almost always wins on lifetime cost because the funding fee is one-time and PMI is not required. For exempt veterans (disability rated), VA is dramatically cheaper than every alternative.