A funding fee is a one-time charge the VA allows lenders to collect, and you can choose to pay it upfront or roll it into your loan balance
The funding fee is a percentage of your loan amount that compensates the Department of Veterans Affairs for the risk it takes by guaranteeing your mortgage. It is not an interest rate, not an insurance premium, and not a tax — it is a single charge collected at closing or added to what you borrow. The VA does not pocket this money; lenders keep it as compensation for issuing a loan backed by a government may provide instead of requiring a down payment.
You have two ways to handle the funding fee: pay it in cash at closing, or have the lender add it to your loan amount so you finance it over the life of the mortgage. Neither choice is automatic — your lender will ask which you prefer, and the choice affects your monthly payment and total interest paid.
Key Takeaways
- The funding fee is a one-time charge ranging from 1.4% to 3.6% of your loan amount, depending on your military service history and whether you have used your VA benefit before.
- You can pay the funding fee in cash at closing or roll it into your loan balance; rolling it in means a higher monthly payment but no cash needed upfront.
- Some veterans are exempt from the funding fee entirely, including those with a service-connected disability rated by the VA and surviving spouses of veterans who died in service.
- If you fund the fee by adding it to your loan, you will pay interest on that amount for the full term of the mortgage, making the true cost higher than the fee itself.
- The funding fee goes to the lender, not to the VA, and exists because VA loans require no down payment and no mortgage insurance.
How the funding fee percentage is calculated
The funding fee is a percentage of your total loan amount, and the percentage depends on three things: your branch of service, whether this is your first time using your VA benefit, and the size of your down payment (if any).
A first-time user with no down payment typically pays 2.3% of the loan amount. If you put down 5% or more, the fee drops to 1.63%. Put down 10% or more, and it falls to 1.4%. If you have used your VA benefit before — for example, you bought a home years ago and sold it — the fee is higher: 3.6% with no down payment, 2.75% with 5% down, and 2.3% with 10% down.
Some branches of service have slightly different rates. The VA publishes the exact table each year, and your lender must show you the fee amount in writing before you sign closing documents. The fee is calculated on the final loan amount after any down payment you make.
Who does not have to pay the funding fee
Veterans with a service-connected disability rated by the VA are exempt from the funding fee, regardless of the disability rating. This is one of the most valuable parts of the VA loan benefit for disabled veterans. You will need to provide your VA disability rating letter at the time you apply for the loan so the lender can confirm your exemption.
Surviving spouses of veterans who died on active duty or from a service-connected disability are also exempt. If you are a surviving spouse, you will need to provide a copy of your spouse's death certificate and documentation showing the death was service-connected.
Active-duty service members do not pay a funding fee on their first VA loan, though they do pay it on subsequent uses of the benefit. Reserve and National Guard members may have different rules depending on their service history; your lender can confirm whether you may have access to for an exemption based on your specific situation.
Paying the fee upfront versus funding it into the loan
If you pay the funding fee in cash at closing, you reduce the amount you finance and therefore reduce the total interest you pay over the life of the loan. For example, on a $300,000 loan with a 2.3% funding fee ($6,900), paying it upfront means you borrow $300,000 and pay $6,900 in cash. Your monthly payment is lower, and you pay no interest on that $6,900.
If you fund the fee by rolling it into the loan, you borrow $306,900 instead. Your monthly payment is higher because you are financing the fee itself, and you pay interest on that $6,900 for 30 years (or however long your term is). On a 30-year mortgage at 6% interest, that $6,900 funding fee costs you roughly $14,900 by the time you pay off the loan.
The choice depends on your cash position at closing. If you have the money and do not need it for other purposes, paying upfront saves you thousands in interest. If closing costs are tight and you need to preserve cash, funding the fee is a legitimate option — it is built into the VA loan program for exactly this reason.
Why the funding fee exists and who receives it
The VA loan program allows you to buy a home with no down payment and no mortgage insurance, which is a significant advantage over conventional loans. The funding fee compensates lenders for taking on that risk. Without it, lenders would demand either a down payment or mortgage insurance, which would cost you more in the long run.
The funding fee goes directly to the lender, not to the VA. The lender uses it to offset the risk of lending without a down payment may provide. Think of it as the price of the benefit: you get to skip the down payment and mortgage insurance, and the lender gets the funding fee as compensation.
The VA does not collect or keep the funding fee. The VA's role is to may provide a portion of the loan, meaning if you default, the VA covers the lender's loss up to the may provide amount. The funding fee is the lender's separate compensation for issuing the loan in the first place.
How the funding fee affects your monthly payment and total loan cost
If you fund the fee into your loan, it increases your loan balance and therefore your monthly payment. On a $300,000 loan at 6% interest over 30 years, the monthly payment (principal and interest only) is roughly $1,799. If you add a $6,900 funding fee, the loan becomes $306,900 and the payment rises to about $1,841 — a difference of $42 per month.
Over 30 years, that $42 monthly difference adds up to roughly $15,120 in additional payments. This is why paying the funding fee upfront, if you can afford it, saves money. However, if paying upfront means you cannot afford the down payment on the property itself or depletes your emergency savings, funding the fee is the right choice for your situation.
Your lender will show you both scenarios in writing before closing so you can see the exact numbers for your loan. This is called a Loan Estimate, and it is required by federal law. Compare the total amount you will pay over the life of the loan under each option, not just the monthly payment.
Funding fees and refinancing
If you refinance your VA loan later — for example, to take advantage of lower interest rates — you may owe a new funding fee on the refinance. The rules depend on the type of refinance. An Interest Rate Reduction Refinance Loan (IRRRL), also called a VA streamline refinance, typically has a lower funding fee (0.55% for most borrowers) because the process is simpler and faster.
A cash-out refinance, where you borrow more than you owe and take the difference in cash, is treated more like a new loan and may have a higher funding fee. Your lender will explain the fee structure for your specific refinance before you proceed.
Frequently Asked Questions
Can I get the funding fee waived if I do not have a disability rating?
No. The only exemptions are for veterans with a service-connected disability rating (any percentage), surviving spouses of service-connected deaths, and active-duty service members on their first VA loan. If you do not fall into one of these categories, the funding fee applies.
What if I pay the funding fee upfront but then need to refinance?
The funding fee you paid on your original loan does not transfer to a refinance. If you refinance, you will owe a new funding fee on the new loan amount. However, a VA streamline refinance has a lower fee (0.55%) and can often be done without an appraisal or credit check, making it cheaper than a conventional refinance.
Does the funding fee count toward my down payment?
No. The funding fee is separate from any down payment you make. If you put 10% down on a $300,000 home, you pay $30,000 down plus the funding fee on the remaining $270,000. The two are calculated independently.
Can I negotiate the funding fee with my lender?
No. The funding fee percentage is set by the VA and does not vary between lenders. However, you can shop around for the best interest rate and closing costs, which will affect your total loan cost. The funding fee itself is fixed.
If I fund the fee into my loan, can I pay it off early without penalty?
Yes. VA loans have no prepayment penalty, so you can pay extra toward principal at any time to pay off the loan faster, including the funded fee. Paying extra principal reduces the amount of interest you pay over the life of the loan.