One of the benefits of serving your country as a member of the U.S. military is gaining access to VA direct and VA-backed home loans. These loans offer veterans, service members, and their survivors access to low-cost VA home loans. These loans do not require a down payment or mortgage insurance and have limited closing costs.

But even though you do not need to purchase mortgage insurance for a VA loan, the U.S. Department of Veterans Affairs does charge borrowers a VA funding fee.

Here’s what you need to know about the VA funding fee.

How does the VA funding fee work?

VA loans are backed by the Department of Veterans Affairs. This means that a portion of these loans are guaranteed by the VA in case of borrower default. This guarantee means the lender can offer more favorable terms since the VA helps cover some of the risk of default.

Read more: Navy Federal Credit Union mortgage review

While VA backing does make it easier for eligible borrowers to afford a VA loan, it could also potentially increase the cost to taxpayers. This is why the VA requires loan borrowers to pay a one-time VA funding fee to defray the cost of guaranteeing the loans.

These fees range from 0.5% to 3.3% of your total loan amount. The exact amount of your VA funding fee will depend on a number of factors, including the type of loan you are taking, the size of your down payment, and how many times you have taken a VA loan.

What types of loans have VA funding fees?

There are a number of different types of home loans that eligible borrowers may access through the VA loan program. These loan types include:

• Loan for the purchase or construction of a house

• Loan for a manufactured home

• Cash-out refinancing loan

• Interest rate reduction refinancing loan (IRRRL)

Tip: In addition to these loans, the VA also charges a funding fee for several less common loans, including Native American Direct Loans, loan assumptions, and vendee loans for borrowers purchasing a property acquired by the VA. You can learn more about those loans on the Department of Veterans Affairs website.

How much is the VA funding fee?

Each type of VA loan has a different funding fee structure. The VA funding fee 2023 rates (which are the most current rates) are as follows:

VA funding fee chart: Purchase and construction loans

Eligible veterans and service members will pay a VA funding fee that depends on the size of their down payment and whether this is their first VA loan.

For example, let’s say you are purchasing a $250,000 house using a VA loan for the first time. Like nearly 90% of VA loan borrowers, you are making this purchase without a down payment. You will have to pay a VA funding fee of 2.15%, or $5,375.

Read more: How to buy a house in 2024

VA funding fee chart: Cash-out refinancing loans

Since you do not pay a down payment for a refinance, the only variable that affects the VA funding fee for a cash-out refinance is whether or not it is your first use. Here’s what you can expect to pay:

VA funding fee chart: Other VA loans

If you are using VA loans to either purchase a manufactured home or to refinance your mortgage to improve your interest rate, the VA funding fee is always the same. The size of your down payment and whether you have taken a VA loan in the past do not affect the funding fee.

Dig deeper: How much money do you need to buy a house?

How do I pay the VA funding fee?

You have two options for paying the VA funding fee. You can choose to pay it as a lump sum at closing, or you can choose to have the fee added to the total loan amount.

While financing the VA funding fee by adding it to your loan total will lower your out-of-pocket costs at closing, it will increase the amount of interest you pay on your loan over time.

Learn more: What is USDA mortgage insurance?

Who is required to pay a VA funding fee?

In general, any borrower who is eligible for a VA loan will be required to pay the VA funding fee. However, there are several exemptions for military service members or veterans who have been injured while serving or for their surviving spouse. Specifically, the following types of VA borrowers are exempt from the VA funding fee requirement:

• Those receiving (or eligible for) VA compensation because of a service-related disability

• Those surviving spouses receiving Dependency and Indemnity Compensation (DIC)

• Those active duty service members who have received a Purple Heart

Read more: Veterans United mortgage review

Refunds

Some borrowers may also be eligible for a refund of the VA funding fee. If you are awarded compensation from the Department of Veterans Affairs for a service-related disability, you may qualify for a refund. However, the disability compensation start date must be retroactively set before the day you closed on the VA loan for you to be eligible for the refund.