What a VA-Backed Purchase Loan Costs Up Front

The VA publishes what a backed purchase loan costs to get into across a few of its own pages. Start with the fee and who’s exempt from it. The cap on what a seller can hand you matters once you write the offer.

What the program does

The VA’s purchase loan page says the loan often offers no down payment, as long as the sales price isn’t higher than the home’s appraised value, and that it needs no private mortgage insurance or mortgage insurance premium. It frames that as borrowing up to the Fannie Mae and Freddie Mac conforming loan limit in most areas, and its entitlement page explains why: full entitlement on your Certificate of Eligibility means no loan limit, while if you’ve already used part of your entitlement, your lender may require a down payment when what’s left doesn’t cover a 25 percent guaranty. Your interest rate, discount points and other closing costs come from the lender, and the VA notes those vary from lender to lender.

The funding fee

The funding fee is a one-time payment that the veteran, service member or survivor pays on a VA-backed or VA direct home loan, and the VA says it helps lower the program’s cost to taxpayers because the loan needs no down payment and no monthly mortgage insurance. It’s calculated as a percentage of the total loan amount, and on a purchase loan it also depends on whether this is your first use and how much you put down. The rate charts, effective April 7, 2023, read like this for veterans, active-duty service members and National Guard and Reserve members: first use with less than 5 percent down, 2.15 percent; with 5 percent or more, 1.5 percent; with 10 percent or more, 1.25 percent. After a first use, less than 5 percent down is 3.3 percent, while the 5 percent and 10 percent bands stay at 1.5 percent and 1.25 percent.

It runs on the loan amount

The VA’s own worked example is worth copying down. On a $200,000 home with a $10,000 down payment, a first-time user pays a funding fee of $2,850, which is 1.5 percent of the $190,000 loan amount. The percentage runs against the loan amount, so a bigger down payment shrinks the base the fee is figured on. You can pay it in full at closing or finance it into the loan and pay it off over time.

Who doesn’t pay it

The VA lists the exemptions: you’re receiving VA compensation for a service-connected disability; you’re eligible for that compensation but receiving retirement or active-duty pay instead; you’re receiving Dependency and Indemnity Compensation as the surviving spouse of a veteran; you received a proposed or memorandum rating before your loan closing date saying you’re eligible for compensation because of a pre-discharge claim; or you’re an active-duty member who provides evidence of a Purple Heart on or before the closing date. There’s a refund path too, if you’re later awarded compensation with an effective date retroactive to before your closing. A proposed or memorandum rating that arrives after closing doesn’t earn a refund.

Closing costs, credits and concessions

You and the seller can negotiate who pays costs like the loan origination fee, discount points, the credit report, the VA appraisal fee, hazard insurance and real estate taxes, state and local taxes, title insurance and the recording fee. The VA puts no ceiling on seller credits toward closing costs. Seller’s concessions are capped at 4 percent of the home’s reasonable value, which appears on the VA Notice of Value your lender provides. Concessions are anything of value added to the transaction at no additional cost to the buyer, and the VA gives examples: a credit for the funding fee, a debt payoff, or prepayment of the buyer’s hazard insurance. On a purchase or construction loan the funding fee is the one cost you can roll into the loan amount, and the rest gets paid at closing.

Writing the offer

If you know the concession cap before you write, you ask the seller for the right thing, and the funding fee tells you what you’ll need on closing day. If you’re a veteran or a service member buying in Greater Boston this fall, send me the property and we’ll work backward from the numbers. I’m Diana Kim, REALTOR with eXp Realty, and I work in English and Korean.