VA Loans: The Funding Fee and What You Are Not Paying

Three features, and the middle one is where the money is

The Department of Veterans Affairs does not lend money either. It guarantees a portion of a loan made by an ordinary lender, and that guarantee is what makes the rest of the structure possible. Three things follow from it, and they are usually listed in the wrong order of importance. There is no required down payment. There is no mortgage insurance, at any loan-to-value ratio, ever. And there is a one-off funding fee that the borrower pays instead.

The no-down-payment feature gets the headlines and is the least interesting of the three, because a down payment is not a cost — it is your own money moving from one asset to another. The absence of mortgage insurance is the actual economic gift, and it is easy to miss because it is an absence. On a comparable conventional loan at 95 percent loan-to-value, private mortgage insurance runs for years and costs, on our worked example elsewhere in this series, between $107.67 and $490.83 a month depending on credit tier, all of it buying the borrower nothing. On an FHA loan at the minimum down payment, the annual premium never cancels at all. The VA borrower pays neither, at any loan-to-value ratio, for the whole life of the loan.

Which leaves the funding fee. It is genuinely the price of the deal, and unlike an insurance premium it does not compound with time — it is charged once, sized as a percentage of the loan, and then it is over. That structural difference, a fixed charge against a recurring one, is what the whole comparison in this article turns on, and it is why the answer depends so strongly on how long you keep the loan and on how expensive the insurance you are avoiding would have been.

The fee schedule, and who does not pay it

The table above reproduces the schedule the Department of Veterans Affairs publishes. Three features of it repay attention. First, the fee falls sharply with the down payment, from 2.15 percent below 5 percent down to 1.25 percent at 10 percent or more — which is worth noticing, because it means a down payment on a VA loan is not pointless, it is a discount coupon on the fee as well as a smaller loan. Second, subsequent use is penalised heavily at the bottom of the range: 3.30 percent instead of 2.15 percent with nothing down, on a $400,000 loan that is $13,200 instead of $8,600. But above 5 percent down, first and subsequent use are priced identically, so a modest deposit erases the second-use penalty entirely. Third, the streamlined interest rate reduction refinance is charged at 0.50 percent regardless of use, which is why it is the cheap manoeuvre in the whole programme.

The exemptions matter more than the schedule for a large share of eligible borrowers, and they are worth reading verbatim on the VA's own page rather than in summary. The department lists, among those who owe no fee: veterans receiving VA compensation for a service-connected disability; those who would be entitled to receive such compensation but receive retirement or active-duty pay instead; surviving spouses receiving Dependency and Indemnity Compensation; borrowers with a proposed or memorandum rating before closing; and service members on active duty who have received a Purple Heart by the closing date. For a borrower in any of those categories the entire comparison changes shape, because the VA loan's only distinctive cost disappears and what remains is a mortgage with no down payment, no insurance and no fee.

One arithmetic note before moving on. The fee is a percentage of the loan amount, not of the purchase price, so a down payment shrinks it twice — once by lowering the rate band, once by lowering the base it applies to. On the $400,000 house, first use with nothing down gives 2.15 percent of $400,000, which is $8,600. Put 10 percent down and it becomes 1.25 percent of $360,000, which is $4,500. The rate fell by 42 percent and the fee by 48 percent.

Financing the fee, and what that costs

The department allows the funding fee — and, on a purchase loan, only the funding fee — to be rolled into the loan amount. Almost everyone does it, and the effect is the same as with the FHA upfront premium: a charge you would otherwise pay once becomes a charge you pay interest on for thirty years. On the $400,000 zero-down first-use case, the loan is written for $408,600 rather than $400,000, and principal and interest at 6.50 percent over 30 years come to $2,582.63 rather than $2,528.27. The fee therefore costs $54.36 a month.

Over the full term that is $19,570 paid for an $8,600 charge, of which $10,970 is interest. Put beside the FHA figures from our companion article — $15,371 paid for a $6,755 upfront premium — the pattern is identical and the lesson is the same: if you have the cash and no better use for it, paying the fee at closing rather than financing it is worth more than it looks. The saving is not the fee; it is the interest on the fee, and at these rates that is more than the fee itself was.

Financing the fee has one further consequence people forget: it puts the loan above the purchase price on day one. On this example the borrower owes $408,600 on a $400,000 house, a loan-to-value ratio of 102.15 percent. There is no insurance consequence, since there is no insurance, and the VA guarantee is unaffected. But it does mean that selling in the first two or three years, after transaction costs, can leave you short — and that is a real risk for a household that may be posted elsewhere. If a move is likely, that fact deserves more weight than the monthly comparison.

Against conventional and against FHA, on one house

Compare three ways of buying the same $400,000 house at the same 6.50 percent note rate over 30 years. VA: nothing down, first use, fee financed, loan $408,600, payment $2,582.63, no insurance. Conventional: 5 percent down, loan $380,000, payment $2,401.86, plus private mortgage insurance until automatic termination in month 135. FHA: 3.5 percent down, loan $392,755 after the financed upfront premium, payment $2,482.48, plus an annual premium that never cancels. To compare fairly, count the down payment as money spent, because the VA borrower keeps it.

At an illustrative PMI rate of 0.72 percent a year, the cumulative totals including the down payment are: at five years, $154,958 for VA against $177,792 conventional and $173,429 FHA; at seven years, $216,941 against $240,908 and $236,988; at ten years, $309,916 against $335,583 and $332,045. The VA loan wins comfortably across every horizon a normal household actually cares about. Only over the full thirty years does the conventional loan pull ahead, at $915,449 against $929,747 — and it does so purely because the VA borrower never handed over the $20,000 deposit, so crediting that money any positive return at all reverses the ranking again.

The cleanest way to state the trade is to price the fee in months of the insurance it replaces. On a $380,000 conventional loan, an $8,600 funding fee equals 23.6 months of private mortgage insurance at 1.15 percent a year, 37.7 months at 0.72 percent, and 79.9 months at 0.34 percent. So a borrower with weak credit recovers the fee in under two years and is ahead from then on; a borrower with excellent credit takes nearly seven years, which is close to the median holding period, so the answer there is genuinely close. Against FHA the comparison barely needs arithmetic: the fee equals about 48 months of the FHA annual premium, and the FHA premium at the minimum down payment does not stop at month 48, or at month 135, or ever.

Entitlement, loan limits and the occupancy rule

Entitlement is the amount of guarantee the department will put behind your loan, and it is the mechanism that used to impose a ceiling. That changed with the Blue Water Navy Vietnam Veterans Act of 2019, effective 1 January 2020: for a borrower with full entitlement, the VA no longer applies a loan limit, so a zero-down purchase is possible at any price a lender will actually underwrite. The limits survive only for borrowers with partial entitlement — typically someone still carrying a VA loan on another property, or who had one end in a way that did not restore entitlement — and those limits track the conforming loan limits, which move every year. Full entitlement can be restored, usually by selling and repaying the earlier loan, which is one reason the subsequent-use fee and the entitlement question are separate matters.

Occupancy is the constraint that makes a VA loan unusable for the thing many people imagine it is for. The programme finances a home the borrower will live in as their primary residence, and the borrower certifies intent to occupy; the department's regulations and its lenders handbook require occupancy within a reasonable time after closing, and the working standard lenders apply is generally 60 days, with documented exceptions for deployment, construction and spouse occupancy. It is not an investment-property loan and not a holiday-home loan. Buying a duplex or small multi-unit building and living in one unit is permitted in principle and comes with its own conditions — read the handbook, not a forum.

One more underwriting feature deserves a mention because it is unusual and works in the borrower's favour: the VA requires a residual income test alongside the usual ratios, checking what is left after housing and other obligations against a published minimum by household size and region. We describe that test in our article on the 30 percent rent rule, where it is the honest alternative to a fixed percentage. Here it means a VA file can be approved with a debt ratio that would fail elsewhere, provided enough is genuinely left to live on — and, occasionally, declined despite a comfortable ratio when it is not.

No down payment is not no cash — and there is no European VA loan

Closing costs do not disappear because the down payment did. Appraisal, title work, recording, prepaid taxes and insurance, and the lender's own charges all still fall due, and the department is explicit that on a purchase loan the funding fee is the only one you may finance. The VA does limit what a lender may charge a veteran and prohibits certain fees outright, and seller concessions are permitted within limits, so the cash requirement is often smaller than on a conventional purchase — but it is not zero, and a buyer who arrives at closing having budgeted only for a deposit they do not need will still be short.

For readers outside the United States, this is the article in the batch with the least to transplant, and it is worth saying plainly rather than manufacturing an equivalence. There is no continental European mortgage product that is defined by military service in the way a VA loan is. Support for serving personnel and veterans in France, Spain, Germany, Portugal and Italy runs mainly through housing allowances, service accommodation, social housing priority and pension arrangements rather than through a guaranteed mortgage with no deposit — and the details differ enough by country and by service that they must be checked with the relevant ministry or veterans' body rather than assumed from an American template.

The nearest structural cousins in Europe are not aimed at veterans at all but at the young. Spain's ICO guarantee line covers up to 20 percent of a first-home loan, and up to 25 percent for a well-rated home, for buyers under 35 and families with dependent children; Portugal's public personal guarantee under Decreto-Lei n.º 44/2024 covers up to 15 percent of the initially contracted principal for first-time buyers aged 18 to 35, within a capped transaction value; Italy's Fondo di garanzia prima casa guarantees a share of the principal within a capped mortgage. Each does the same structural job as a VA guarantee — it stands behind the lender so the deposit requirement can fall — and each is generally free to the eligible buyer, with no analogue of the funding fee at all. The eligibility rules and percentages change; read them at the source in the year you buy.

Frequently asked questions

Should I make a down payment on a VA loan even though none is required?

It buys three things at once, which is unusual. It cuts the funding fee rate from 2.15 percent to 1.50 percent at 5 percent down and 1.25 percent at 10 percent, it shrinks the base the fee applies to, and it lowers the loan. On our $400,000 example, zero down at first use gives a fee of $8,600 while 10 percent down gives $4,500. It also removes the awkward position of owing more than the house cost on day one. Whether it beats leaving the money invested is your own call, but the fee discount is a guaranteed, immediate return on the deposit that few alternatives match.

Can I use a VA loan more than once?

Yes. The entitlement is not consumed permanently; it is restored when an earlier VA loan is repaid, typically on sale. What changes is the funding fee: a subsequent use with less than 5 percent down is charged 3.30 percent rather than 2.15 percent, which on a $400,000 loan is $13,200 rather than $8,600. Above 5 percent down that penalty vanishes entirely, since first and subsequent use are priced identically at 1.50 and 1.25 percent. It is also possible to hold two VA loans at once using remaining partial entitlement, and that is where county loan limits still bite — a case to work through with a lender rather than a table.

Can I rent out a house I bought with a VA loan?

Not as the plan. The loan requires you to certify that you will occupy the property as your primary residence, and the department expects occupancy within a reasonable time after closing — lenders generally work to 60 days, with documented exceptions for deployment, construction and occupancy by a spouse. What happens years later, after a genuine change of circumstances such as a posting, is a different question and is handled case by case. Buying a small multi-unit property and living in one unit while letting the others is permitted in principle under its own conditions. Any of these should be confirmed against the current VA Lenders Handbook and your lender before you sign anything.

If I am exempt from the funding fee, is a VA loan simply the best option?

On cost, it is very hard to beat. With the fee waived you get no down payment, no mortgage insurance and no distinctive charge — on our example, principal and interest of $2,528.27 on a $400,000 loan with nothing down and nothing added. The remaining variables are the note rate and the closing costs, which differ between lenders and should still be shopped. The genuine reasons to look elsewhere are non-financial: the occupancy requirement, the appraisal and property condition requirements, and sellers in competitive markets who prefer another financing type. Those are worth weighing; the arithmetic, in this case, mostly is not.

How does a VA loan compare with FHA over a realistic holding period?

It wins, and not narrowly. On the same $400,000 house at the same 6.50 percent rate, counting the down payment as money spent, the VA borrower has paid $216,941 at seven years against $236,988 for the FHA borrower — a $20,047 gap that comes almost entirely from an annual premium the FHA borrower cannot cancel and the VA borrower never had. The funding fee equals only about 48 months of that FHA premium, and the premium keeps running long after the fee has been recovered. Where the comparison is genuinely close is against a conventional loan for a borrower with excellent credit, whose private mortgage insurance is cheap and cancellable.