The VA funding fee is the one cost that gives many veterans pause when considering a VA home loan. But understanding exactly how it works — and who pays nothing at all — changes the calculation entirely. Disabled veterans with a service-connected rating of 10% or higher pay zero. Surviving spouses receiving DIC pay zero. Active duty service members who earned a Purple Heart before closing pay zero. For the roughly 40% of VA borrowers who qualify for exemption, the VA loan has no upfront mortgage cost whatsoever. For everyone else, a one-time fee replaces years of monthly PMI — and the math almost always favors VA.
The VA home loan guaranty program is self-sustaining — it does not rely on annual Congressional appropriations to cover loan defaults. Instead, the program collects the VA funding fee from borrowers to build and maintain a guaranty reserve fund. When a borrower defaults, the VA uses this fund to reimburse the lender up to 25% of the loan amount, which is what enables lenders to offer zero-down financing at competitive rates.
The funding fee was established under 38 U.S.C. § 3729 and has been part of the VA loan program since 1982. It replaced a more restrictive structure where Congress had to appropriate money for every default — the fee-based model made the program financially independent and allowed it to expand significantly.
Critically: the VA funding fee is paid once at closing (or rolled into the loan), not monthly. This is what makes it structurally different from PMI. A conventional borrower who puts 5% down on a $400,000 home might pay $150–$250 per month in PMI for 7–10 years before reaching 20% equity — a total cost of $12,600–$30,000. The VA funding fee on the same loan is $6,000 at first use (1.50% with 5% down), paid once and done.
Current rates are set by statute at 38 U.S.C. § 3729 and are effective for VA loans closed after January 1, 2020. The rates below are current as of 2025 and apply to all VA-guaranteed loans except those made to exempt borrowers.
| Usage | Down Payment | Funding Fee Rate | Fee on $400K |
|---|---|---|---|
| First use | 0% | 2.15% | $8,600 |
| First use | 5–9.99% | 1.50% | $6,000 |
| First use | 10%+ | 1.25% | $5,000 |
| Subsequent use | 0% | 3.30% | $13,200 |
| Subsequent use | 5–9.99% | 1.50% | $6,000 |
| Subsequent use | 10%+ | 1.25% | $5,000 |
| Exempt (any use) | Any | $0 | $0 |
| Loan Type | Usage | Funding Fee Rate |
|---|---|---|
| IRRRL (Interest Rate Reduction Refinance) | Any | 0.50% |
| Cash-Out Refinance | First use | 2.15% |
| Cash-Out Refinance | Subsequent use | 3.30% |
| Loan Type | Funding Fee Rate |
|---|---|
| Manufactured home (not on permanent foundation) | 1.00% |
| Construction loan | 2.15% |
| Loan assumption | 0.50% |
Subsequent use means you have previously had a VA-guaranteed loan. If your prior VA loan was fully paid off and your entitlement restored, subsequent use rates still apply to purchase loans without a qualifying down payment. The only way to return to first-use rates is if you never had a VA loan before — once used, purchase fee rates follow the subsequent-use schedule regardless of entitlement restoration.
The VA funding fee exemption applies to the following groups under 38 U.S.C. § 3729(c):
Any veteran who is receiving, or entitled to receive, VA disability compensation for a service-connected disability is exempt. This includes veterans at every rating from 0% (if receiving compensation) through 100%. The key is that compensation payments have been awarded — if your rating is 10% but you've waived compensation in favor of military retirement pay, check with your lender about exemption status.
Veterans who have a pending disability claim as of the loan closing date are not automatically exempt — exemption requires that compensation has been awarded, not merely applied for. However, veterans who close a loan while a claim is pending and are subsequently rated may qualify for a retroactive refund (see below).
Active duty service members who have been awarded a Purple Heart prior to the loan closing date are exempt. The Purple Heart award must precede the closing date — not just be pending or submitted for approval.
Surviving spouses who are receiving Dependency and Indemnity Compensation (DIC) from the VA — the monthly benefit paid to spouses of veterans who died from service-connected causes — are fully exempt from the funding fee.
In some cases, lenders will accept a proposed or memorandum rating (a preliminary VA determination) to establish exemption before a formal rating decision is issued. Check with your lender — not all accept this, but VA guidance does recognize pre-discharge disability ratings in certain circumstances.
Approximately 35–40% of VA loan borrowers in recent years were exempt from the funding fee. If you have any service-connected condition — even a minor one — filing your disability claim before your loan closing date could save you thousands. A 10% rating on tinnitus alone eliminates a $8,600 fee on a $400,000 purchase.
Proving your exemption is straightforward — the lender must verify it before closing and cannot charge the fee to an exempt borrower.
Most VA-approved lenders have access to the VA's Loan Guaranty system (WebLGY), which pulls compensation status directly. If your disability compensation is active and in the VA system, the exemption will be automatically identified when the lender pulls your Certificate of Eligibility (COE). No separate documentation is required in most cases.
If your exemption is not automatically identified through WebLGY — for example, if you recently started receiving compensation or if there's a discrepancy — you can request a funding fee exemption letter from the VA. Contact your VA Regional Loan Center (1-877-827-3702) or your regional VA benefits office. This letter confirms your compensation status and instructs the lender to waive the fee.
Your most recent VA disability award letter (the formal document the VA sends notifying you of a rating decision and compensation amount) serves as documentation that you receive compensation. Lenders will typically accept a copy of this letter, though they will still verify it in VA systems.
If you are exempt, the fee should appear as $0 on your Loan Estimate and Closing Disclosure. Review these documents carefully — errors happen. If the fee appears when you believe you're exempt, raise it immediately with your lender before closing.
You don't have to pay the funding fee out of pocket at closing. VA regulations permit borrowers to roll the entire funding fee into the loan amount — this is called "financing" the fee.
Example: You purchase a $400,000 home with $0 down. The first-use funding fee is 2.15% = $8,600. You can finance this: your loan amount becomes $408,600. Your down payment remains $0.
The trade-off: financing the fee slightly increases your monthly payment and the total interest you pay over the life of the loan. On a 30-year mortgage at 6.5%, an additional $8,600 in loan principal costs roughly $54/month and about $19,000 in total additional interest over 30 years. Still, for veterans who are cash-limited at closing, financing the fee preserves capital for moving expenses, home repairs, or reserves.
One practical note: financing the fee means your loan-to-value ratio is technically above 100% at origination (you owe $408,600 on a $400,000 home). This doesn't affect your VA loan eligibility, but if you need to sell quickly and the home hasn't appreciated, you may have negative equity temporarily.
Here's the funding fee in dollar terms across common purchase prices at the most common first-use, 0% down rate of 2.15%:
| Home Price | 2.15% (First Use, 0% Down) | 3.30% (Subsequent, 0% Down) | 1.25% (10%+ Down, Any Use) |
|---|---|---|---|
| $250,000 | $5,375 | $8,250 | $3,125 |
| $350,000 | $7,525 | $11,550 | $4,375 |
| $400,000 | $8,600 | $13,200 | $5,000 |
| $500,000 | $10,750 | $16,500 | $6,250 |
| $600,000 | $12,900 | $19,800 | $7,500 |
| $766,550 (2025 limit) | $16,481 | $25,296 | $9,582 |
The most common objection to the VA funding fee is: "Wouldn't I be better off putting 3% down on a conventional loan and avoiding the fee altogether?" The answer depends on whether you're comparing the total cost of homeownership over time — and when you run the numbers, VA almost always wins for veterans without a large down payment.
Loan amount: $400,000 (+ $8,600 fee = $408,600)
Monthly P&I: ~$2,583
Monthly PMI: $0
Total monthly: ~$2,583
Upfront cash needed: $0–$8,600 (if financing fee)
Down payment: $12,000
Loan amount: $388,000
Monthly P&I: ~$2,453
Monthly PMI (est. 0.9%): ~$291
Total monthly: ~$2,744
Upfront cash needed: $12,000+
Despite the funding fee, the VA loan saves roughly $161/month because there's no PMI. PMI on the conventional loan continues until the borrower reaches 20% equity — at 3% down on a $400K home at normal appreciation, that's typically 7–10 years. Over 8 years, PMI alone costs about $27,936 ($291 × 96 months).
The VA funding fee of $8,600 is completely offset by PMI savings in roughly 53 months — under 4.5 years. After that, the VA borrower is ahead by $161/month indefinitely. The break-even is even faster if the VA loan also carries a lower interest rate (which it typically does by 0.25–0.50%).
For eligible veterans, conventional financing with 3% down rarely makes financial sense. The exception is if you have a high credit score (760+), a 20% down payment available, and no plans to stay long enough for the VA break-even to materialize.
One of the most overlooked VA loan provisions is the retroactive funding fee refund available to veterans who paid the funding fee and were subsequently rated for a service-connected disability.
Under 38 U.S.C. § 3729(c), if a veteran paid the VA funding fee and later receives a service-connected disability rating that would have made them exempt at the time of closing, they are entitled to a refund of the fee paid.
There is no strict statutory deadline for this refund, but the VA has discretion in processing older claims. File as soon as your rating is awarded. Veterans who had disability claims pending at the time of closing — and who were subsequently rated — have the strongest entitlement to this refund.
The refund is processed as a check from the VA (not the lender). If you financed the fee into your loan, the VA will send you the refund check, and you can apply it as a principal payment — reducing your loan balance by the refunded amount.
If you're considering a VA home loan and have any service-connected conditions, file your disability claim with VA before you close. Even a 10% rating eliminates the funding fee entirely. Use our VA Home Loan guide or start your claim here. The potential savings are $5,000–$16,000+ depending on your loan size.
The VA funding fee is manageable — and for a significant percentage of veterans, it doesn't exist at all. Here's what to do before your VA loan closes:
Tinnitus, knee pain, back pain — these are 10% conditions that thousands of veterans have service-connected. If you haven't filed your disability claim yet, start before you close on your home.
Start Your VA Disability Claim — Free →