VA Funding Fee: Rates, Exemptions and the 5% Threshold That Halves It

Exemption is the most valuable thing in this guide, and it's under-claimed.

You pay no funding fee at all if you are:

• A veteran receiving VA disability compensation for a service-connected disability — any rating from 10% upward.
• A veteran who would be entitled to compensation but for receiving retirement or active-duty pay.
• An active-duty service member who has received a Purple Heart, subject to VA's conditions.
• A surviving spouse receiving Dependency and Indemnity Compensation.

The funding fee is what replaces mortgage insurance on a VA loan — and comparing them fairly means comparing a one-time charge against an ongoing one.

Over a full loan term the VA funding fee is frequently the cheaper structure, particularly for borrowers with weaker credit — conventional PMI scales sharply with credit score while the VA fee does not care about it at all. And for an exempt veteran, the comparison isn't close: zero versus years of monthly premiums.

You can pay the fee at closing or finance it into the loan. Financing is by far the more common choice, and it's the reason VA loans can genuinely close with no money down — but it isn't free.

On a $350,000 first-use purchase with nothing down, the fee is $7,525. Financed, that becomes part of a $357,525 loan, and you pay interest on it for as long as you hold the mortgage. Paid at closing, it costs $7,525 and nothing more.

Two further points:

• A seller can pay it as part of a seller concession, subject to VA's concession limits. Worth asking for — see getting the seller to pay closing costs.
• Tax treatment: the funding fee has historically been treated as deductible mortgage insurance in years when that deduction was in force, but the provision has lapsed and been renewed repeatedly. Don't assume it applies to your tax year — check the current rules or ask a tax professional rather than relying on an article.

How much is the VA funding fee?

0.50% to 3.30% of the loan amount depending on the loan type, your down payment and whether you've used your VA benefit before. First-time buyers with no down payment pay 2.15%; repeat users with no down payment pay 3.30%. Five percent down brings both to 1.50%, and 10% down brings both to 1.25%. IRRRL streamline refinances are 0.50%.

Who is exempt from the VA funding fee?

Veterans receiving VA disability compensation at any rating of 10% or higher, veterans who would be entitled to compensation but for receiving retirement or active-duty pay, active-duty Purple Heart recipients subject to VA conditions, and surviving spouses receiving Dependency and Indemnity Compensation.

Is the VA funding fee refundable?

In one important case, yes: if you're granted a disability rating retroactive to a date before your loan closed, you may be entitled to a refund of the fee you paid. Contact your servicer or VA regional loan center. Outside that scenario the fee isn't refundable, and nobody will proactively tell you if you qualify.

VA funding fee vs PMI — which costs more?

Over a full loan term the VA fee is often cheaper, because it's a one-time charge while PMI is monthly until you reach 80% loan-to-value. The VA fee is also unaffected by your credit score, whereas conventional PMI rises steeply as credit falls. For an exempt veteran the comparison isn't close.

Can the VA funding fee be financed into the loan?

Yes, and most borrowers do. It's added to the loan amount rather than paid at closing, which is how VA purchases can close with genuinely nothing down. You then pay interest on it for the life of the loan, so it's cheaper to pay upfront if you have the cash.

Is the VA funding fee tax deductible?

It has been treated as deductible mortgage insurance in years when that deduction was in force, but the provision has lapsed and been renewed several times. Whether it applies to your tax year depends on current law — check with a tax professional rather than relying on any article, including this one.