VA home loans make home ownership accessible and affordable for millions of qualified veterans, active duty service members, and military families.
These non-conventional mortgages are guaranteed by the Department of Veterans Affairs (VA), which reduces risks for lenders that offer VA loans and allows those lenders to qualify homebuyers based on less stringent requirements than traditional mortgages.
Borrowers who qualify for a VA home loan also benefit from:
Although there are many benefits associated with VA home loans, there are also a few important factors to consider before applying for a VA mortgage.
For example, not everyone can get a VA home loan. You must meet certain eligibility requirements to qualify. Additionally, VA loans can’t be used to finance a second home or investment property and you will be responsible for paying the VA funding fee at closing.
No one likes paying extra fees, but here’s some good news. In early 2023, the VA announced a VA funding fee reduction for certain VA mortgages that could result in significant savings over the life of the loan.
Let’s take a closer look at the VA funding fee basics and what the 2023 reduction means for homebuyers.
The VA funding fee is a one-time payment by the borrower that is used to offset taxpayer costs for the VA loan program and fund lender reimbursement in the event a borrower defaults on their loan.
Although the majority of VA home loan recipients are required to pay the funding fee, there are a few exceptions, including borrowers who have at least a 10 percent VA disability rating and those who have received the Purple Heart award.
The size of the funding fee will vary depending on whether you are purchasing or refinancing a home, the amount of your down payment, and how many times you have used the VA loan benefit.
You can pay the funding fee in a lump sum at closing or finance it over the life of the loan. However, it’s important to note that you will pay interest on the funding fee if you use the financing option.
In February 2023, the Department of Veterans Affairs announced a scheduled change to VA funding fee rates for purchase, new construction, and cash-out refinance loans closing on or after April 7, 2023.
Prior to the reduction, VA funding fees for home purchases were 1.4-3.6 percent of the loan amount. Fees for a VA refinance were 0.5 percent for an interest rate reduction refinance loan (IRRRL) and 3.6 percent for a repeat VA borrower using a cash-out refinance.
After the 2023 reduction, VA funding fees for purchases are 1.25-3.3 percent of the loan amount, while fees for a refinance are 0.5 percent for an IRRRL and 3.3 percent for a repeat cash-out refinance.
The tables below show how the funding fee is applied to different scenarios for home purchases and cash-out refinances made by veterans, active-duty service members, and National Guard and Reserve members.
|
If your down payment is… |
Your VA funding fee will be… |
|
|
First use |
Less than 5% |
2.15% |
|
5% or more |
1.5% |
|
|
10% or more |
1.25% |
|
|
After first use of VA loan benefit |
Less than 5% |
3.3% |
|
5% or more |
1.5% |
|
|
10% or more |
1.25% |
|
First use of VA loan benefit |
After first use |
|
2.15% |
3.3% |
Source: https://www.va.gov/housing-assistance/home-loans/funding-fee-and-closing-costs/
Let’s take a look at these numbers in context to see how the 2023 VA funding fee rate reduction can lower the cost of buying a home.
Suppose you are using a VA loan for the first time and you’re buying a $300,000 home. If you make a down payment of $15,000, or 5 percent of the $300,000 loan, you’ll pay a VA funding fee of $4,275, or 1.5 percent of the $285,000 loan amount.
In this scenario, you’ll save $427.50 compared with the 2022 funding fee rate of 1.65 percent of the loan amount, which would have required a funding fee payment of $4,702.50.
We encourage you to use the tables above to play around with the numbers to estimate how much you could potentially save on a VA mortgage.
The 2023 VA funding fee reduction is one more reason why a VA home loan could be the perfect mortgage for you.
If you would like to learn more about the benefits of VA loans and how to qualify for one, contact us. We are nationally recognized as one of the top VA lenders in the country, and our team of experienced mortgage lenders is here to help.
We also put together a comprehensive checklist to help first-time homebuyers—and anyone else with questions about the home-buying journey—navigate the unknowns of applying for a mortgage and purchasing a home. Get your copy today!