The VA Loan Funding Fee Explained: What Veterans Pay and Who's Exempt
The VA funding fee confuses more of our buyers than any other line on a VA loan estimate. The amount changes with your down payment and with how many times you've used the benefit, and a large group of veterans owes nothing at all. If you're planning a purchase in Chicagoland or anywhere else, you should know which group you're in before you set a budget.
What the VA Funding Fee Pays For
The funding fee is a one-time charge on a VA-backed home loan. VA uses it to lower the program's cost to taxpayers, since a VA loan doesn't require a down payment or monthly mortgage insurance. A conventional buyer with a small down payment often carries private mortgage insurance on every monthly bill. You pay the VA fee once, and no mortgage insurance charge follows you after closing.
VA sets the fee as a percentage of the loan amount, not the purchase price. Your lender calculates it, and you'll see it on your Loan Estimate and again on your Closing Disclosure.
How Your Down Payment and Prior VA Use Set the Rate
For a purchase loan, VA looks at two things: how much you put down and whether you've used a VA home loan before. These rates come from VA's funding fee and closing cost page and took effect April 7, 2023:
First use, less than 5% down: 2.15%
First use, 5% or more down: 1.5%
First use, 10% or more down: 1.25%
After first use, less than 5% down: 3.3%
After first use, 5% or more down: 1.5%
After first use, 10% or more down: 1.25%
The zero-down repeat buyer pays the steepest rate. Once you put at least 5% down, first-time and repeat buyers pay the same percentage.
Take a $360,000 home as an example. With nothing down on your first VA loan, you'd borrow $360,000 and owe a fee of $7,740. Put 5% down ($18,000) and the fee falls to $5,130 on a $342,000 loan. At 10% down, you'd pay $4,050. A repeat user with zero down would owe $11,880 on the same house.
Refinances follow their own chart. A VA cash-out refinance costs 2.15% on first use and 3.3% after that, and an interest rate reduction refinance (IRRRL) costs 0.5%.
Using Your Benefit a Second Time
Plenty of military families buy with a VA loan at one duty station, then keep or sell that house and buy again with VA financing after the next set of orders. That second purchase counts as subsequent use, and at zero down the fee climbs from 2.15% to 3.3%. VA makes one exception: if your only prior VA loan bought a manufactured home, you still pay the first-use rate.
Our post on how VA loan entitlement works covers using the benefit more than once. For a repeat buyer with savings, a 5% down payment cuts the fee by more than half. Whether that's the best use of your cash depends on your reserves, your moving costs, and how long you expect to stay.
Who Doesn't Pay the Funding Fee
VA waives the fee if any of these describe you:
You receive VA compensation for a service-connected disability.
You're eligible for that compensation but receive retirement or active-duty pay instead.
You receive Dependency and Indemnity Compensation (DIC) as the surviving spouse of a veteran.
You're a service member with a proposed or memorandum rating, issued before closing, that says you're eligible for compensation based on a pre-discharge claim.
You're on active duty and give your lender proof of a Purple Heart on or before closing day.
The first item covers more veterans than most people assume. You don't need a 100% rating. A 10% rating that pays compensation earns the same exemption as a 100% rating. On the $360,000 zero-down example above, the exemption keeps $7,740 off a first-time loan and $11,880 off a repeat one.
A disability rating can affect more than the funding fee. Our earlier post on VA loans and service-connected disability covers other benefits, and Cook County homeowners should read how the Illinois homestead exemption for veterans with disabilities can lower a property tax bill.
Confirm Your Exemption Before You Budget
Some veterans with a disability rating hear that VA loans carry a funding fee and build it into their budget without asking whether it applies to them. Others assume they're exempt when their rating doesn't pay compensation. Both mistakes surface late in the process if nobody checks.
Tell your lender about any service-connected compensation in your first conversation, before pre-approval. Your exemption status changes your loan amount, your monthly payment, and the price range you can afford, so it belongs in the numbers from day one. Look for the fee on your Loan Estimate. Your lender must send the Closing Disclosure three business days before closing, and you should use that window to confirm the fee still matches your status.
Rating decisions and closing dates don't always line up. If VA later awards you compensation with an effective date before your closing, you may qualify for a refund of the fee you paid. A proposed or memorandum rating that arrives after closing won't earn a refund. If you have a claim pending and a PCS report date coming, ask your lender how the timing affects you before you pick a closing date.
We work with lenders who know the VA loan in depth, including how BAH counts as income and how PCS orders affect timing, and we can refer you to one who fits your situation.
Paying the Fee at Closing or Financing It
You can pay the funding fee in cash at closing or add it to your loan. On a VA purchase loan, the funding fee is the only cost VA lets you finance. You pay every other closing cost when you close.
Financing the fee keeps more cash in your account on moving day, when you may also be paying movers, utility deposits, and the first round of furniture. The cost is interest on the fee for the life of the loan and a higher starting balance. If you expect to sell after your next PCS in three years, that larger balance leaves you with less equity when you go.
A seller can also cover the fee. VA counts a funding fee credit as a seller concession and caps concessions at 4% of the home's reasonable value. In a Chicago neighborhood where well-priced homes draw several offers, asking for that credit can weaken yours. On a suburban listing that has sat for weeks, it may be a fair request. We'll tell you which situation you're facing.
How We Work With VA Buyers in Chicagoland
We're a veteran-led team, and the funding fee is one of the first numbers we review with a VA buyer. Chicagoland adds its own pressure on cash to close. Illinois property tax bills run higher than in many states, condos and townhomes come with association dues, and older bungalows and two-flats often need repairs that show up at inspection. A few thousand dollars in fees changes which homes fit your budget.
We're a Mil-Estate affiliate and Chicagoland's only Mil-Estate affiliated team. If you're moving here, our relocation concierge can help you compare neighborhoods and commutes from your current duty station. If orders take you out of the area, our referral network can connect you with an agent who knows VA loans in your next market. Civilian buyers get the same care from us on conventional and FHA purchases.
If you'd like a second set of eyes on your funding fee status or your budget, send us a note and we'll sit down with you.
