What are the costs of financing the VA loan? | Smart change: personal finance
If you are a veteran looking for a new home, chances are you are considering a loan from the United States Department of Veterans Affairs (VA). And for good reason: a VA loan can help you finance the purchase of a home for as little as $ 0 down payment, even if your credit isn’t in top shape, without having to pay mortgage insurance.
However, this does not mean that there is no cost for this option. If you choose to borrow a VA home loan, you will need to pay VA financing fees. The amount of these fees will depend on several factors, including the amount of your deposit.
Before you go too deep in the mortgage process, learn more about VA financing fees and how you should budget for this potential loan cost.
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What are the VA financing fees?
VA loans are issued by private banks, but are partially backed by the Department of Veterans Affairs. This means that if a borrower does not repay the loan, the federal government insures a portion of these funds so that the issuing lender does not pay the entire remaining balance.
VA loans are also reusable, which means you can use your entire VA entitlement – the maximum amount the Veterans Administration will pay your lender if you don’t pay your mortgage – over and over again. as long as you pay off the loan each time. This right or guarantee reduces the risk for the lender to approve a loan for a borrower who may have no down payment and a lower than average credit rating.
In order to support this loan program and ensure its sustainability, VA loans require financing fees. These are one-time fees that you must pay when closing a VA loan used to buy, build, improve, or repair a home, or when refinancing an existing VA mortgage, unless you meet certain requirements. conditions.
How Much Are the VA Loan Funding Fees?
The cost of financing VA loans fluctuates over time. Before 2020, the same fees were in effect from 2011 to 2019. The 2020 financing fees will be in effect until January 1, 2022. After this date, they will be revised again.
The amount you are charged for the VA financing fee depends on the amount of money you invest in a deposit, as well as if you’ve used a VA loan before. If you have used your full VA entitlement in the past, future uses are considered “future”.
In general, the VA financing costs are not huge. However, you can reduce the amount you have to pay by making a larger deposit.
First-time VA mortgage borrowers who deposit less than 5% must pay a fee of 2.30% of the total loan amount. Subsequent borrowers who deposit less than 5% are charged 3.60%. First-time borrowers and subsequent borrowers who deposit at least 5% but less than 10% pay a fee of 1.65%. Both pay a fee of 1.40% if they deposit 10% or more.
Say, for example, you’re a first-time VA loan borrower who doesn’t put money on a $ 250,000 loan. You can expect to pay a fee of $ 5,750 (2.30%). If you pay 10% ($ 25,000) instead, you will be charged a fee of $ 3,150 (1.40%) on the remaining $ 225,000.
Keep in mind that these fees only apply to purchase and construction loans. If you do a refinancing of collection of an existing VA mortgage, first-time borrowers pay a financing fee of 2.3%, and subsequent borrowers pay 3.6%.
However, these higher refinancing fees do not apply to Will streamline refinancing (also known as Interest Rate Reduction Refinance Loans, or IRRRL). This program allows new and future borrowers to replace an existing VA loan with a new VA loan that charges a lower interest rate, and the fee is only 0.50%.
VA Funding Fee Exemptions
Not all VA borrowers are required to pay finance charges. From 2021, you are exempt from the fee if you are:
- Receive compensation for a service-related disability
- Entitled to compensation for a service-related disability, but you receive retirement or active service compensation instead
- A soldier with a proposed rating or memo, before the loan closing date, indicating that you are eligible for compensation due to a claim for disability benefits before the leave
- An active duty member who received a Purple Heart
- A surviving spouse of a Veteran who died in service or from a service-related disability, or who was totally disabled, and you are receiving a dependency allowance and an allowance
It is possible to obtain reimbursement of VA financing costs if you later receive VA compensation for a service-related disability. The effective date of this compensation must be retroactive to before the closing date of your loan. For example, if you had a claim pending when you got your VA mortgage that was approved after the loan was closed, you are probably entitled to a repayment.
If you are not sure whether you qualify for the VA Funding Fee Exemption, you can check your VA loan. Certificate of eligibility (COE). This document will indicate whether you are exempt or not. If you don’t have a COE, you can apply for one on the VA loan site.
How to Pay the VA Funding Fee
The VA finance charge is due at the time of loan closing. You can pay for it in different ways.
First, you can choose to pay the full cost up front as part of your closing costs. This means that you must have the cash on hand at the time of closing. This option is the cheapest in the long run, although it is not always possible.
If you are unable to find that much cash on closing, you also have the option of extending the fees to your loan. This might be the most convenient option, but it also means you’ll pay more over time as the fees roll into your principal balance and earn interest.
Suppose, for example, that you borrow a 30-year, $ 250,000 VA mortgage at an interest rate of 3.5%. Your monthly payment would be $ 1,122. If you were to pay a 2.3% VA finance charge, that would be $ 5,750 disbursed at closing.
However, if you included that $ 5,750 in your loan balance (for a total of $ 255,750 borrowed), your monthly payments would increase to $ 1,148 and you would end up paying an additional $ 3,545 in interest over the life of your loan. .
Also keep in mind that the VA loan financing fee is not the only cost associated with your mortgage on top of the principal and interests. You may also need to pay other closing costs like lender fees, appraisal fees, points and property taxes. It’s important to consider the total cost of your mortgage, and not just the financing costs, when considering how much to borrow and how to handle the upfront costs.