How VA Loans Work
A VA loan is a mortgage from a private lender, partly guaranteed by the U.S. Department of
Veterans Affairs. That guarantee is what unlocks the terms no other mainstream loan matches:
no down payment required, no mortgage insurance at any down payment,
and no prepayment penalty. Eligibility runs through your service record — most borrowers confirm it
with a Certificate of Eligibility (COE) — and the loan must be for a primary residence. The single
mandatory cost unique to VA loans is the funding fee, modeled exactly above.
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The VA funding fee (official chart)
The funding fee is a one-time charge, expressed as a percentage of the loan amount, that keeps the
program running for the next veteran. For purchase and construction loans it steps down as your
down payment grows — and jumps for repeat use at low down payments:
| Loan type | Down payment | First use | Subsequent use |
|---|
| Purchase / Construction | Less than 5% | 2.15% | 3.30% |
| Purchase / Construction | 5% to 10% | 1.50% | 1.50% |
| Purchase / Construction | 10% or more | 1.25% | 1.25% |
| Cash-Out Refinance | — | 2.15% | 3.30% |
| IRRRL (streamline refinance) | — | 0.50% | 0.50% |
| Loan Assumption | — | 0.50% | 0.50% |
| Manufactured Home (not permanently affixed) | — | 1.00% | 1.00% |
The current chart is uniform across eligibility categories — active duty, Guard and Reserve, and
surviving spouses pay the same purchase rates; category decides entitlement, not the fee. Two
levers do move the fee: your down payment tier, and paying it in cash instead of financing it
(financing is allowed, but you then pay interest on the fee for the life of the loan — the results
above price that difference). And for many borrowers the fee is simply zero:
veterans receiving compensation for a service-connected disability, and surviving spouses of
veterans who died in service or from a service-connected disability, are exempt.
No PMI — the quiet superpower
Put 3.5% down on an FHA loan
and you pay mortgage insurance for the life of the loan; put under 20% down on a conventional loan
and PMI follows you until 80% LTV. A VA loan charges neither — ever. On the default loan above, the
one-time funding fee replaces roughly $32,500 of conventional PMI. That is why,
for anyone with entitlement, VA is usually the cheapest low-down-payment path even after the fee,
and why comparing loans on rate alone misleads: compare total insurance-type costs, as the box
above does. Two more structural pluses: there is no VA loan limit for borrowers
with full entitlement (lenders set their own ceilings), and sellers may contribute up to 4% of the
price toward your closing costs. On the qualifying side, lenders lean on a 41% back-end
debt-to-income guideline plus a residual-income test rather than a hard cutoff — check your fit
with the house affordability calculator.
Prepayments
Federal regulation (38 CFR §36.4314) guarantees the right to prepay a VA loan at any time, in whole
or in part, with no premium or fee. The extra-payment fields above are therefore pure upside:
every extra dollar goes to principal, shortens the term, and cuts total interest — with the largest
effect in the early years, when the balance (and the financed funding fee inside it) is highest.
FAQ
How much is the VA funding fee?
2.15% of the loan at under 5% down on first use (3.30% on subsequent use), dropping to 1.50% at 5–10% down and 1.25% at 10%+. IRRRL and assumption loans pay a flat 0.50%.
Who is exempt from the funding fee?
Veterans receiving compensation for a service-connected disability, and surviving spouses of veterans who died in service or from a service-connected disability, pay no funding fee at all.
Should I finance the funding fee or pay it in cash?
Financing preserves your cash but you pay interest on the fee for decades — on a $10,750 fee at 7.3%, roughly $15,800 of extra interest over 30 years. If the cash is available without draining your reserves, paying upfront is usually cheaper.
Can I use my VA loan benefit again?
Yes — entitlement is reusable. Just note the subsequent-use funding fee (3.30%) when putting down less than 5%.
Disclaimer: This calculator provides estimates for educational purposes only and does not constitute financial
advice. Funding fee rates follow the VA.gov chart effective April 7, 2023; eligibility, entitlement and lender
requirements vary by borrower and lender.