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Understanding The Funding Fee With VA Loans

Mortgage lenders understand the ins and outs of all the mortgage programs they offer, but you might have questions about specific ones. For example, are you thinking about using a VA loan to buy a house? If so, you might have questions about these loans, including questions about the funding fee. Here are several things to know that can help you understand how the funding fees work with VA loans.

The Basics of VA Loans

Before you learn about the funding fee, you might want to know a couple of details about VA loans. First, VA loans are loans that banks issue. Many people think that the VA issues them, but this is not true. The Department of Veterans Affairs (VA) insures the loans but does not issue them. Insuring the loans means that they pay the loan balances and losses to the lenders if a borrower defaults.

The Purpose of the Funding Fee

When lenders issue VA loans, they must collect a funding fee from each borrower. The funding fee is a charge required by the VA. The primary purpose of this charge is to compensate the VA for the insurance they offer. The VA collects these funding fees and uses them to bail people out when necessary. Without collecting this fee, the VA might lose a lot of money. Therefore, they require that all borrowers pay the fee when they take these loans.

The Amount You Must Pay

The amount you must pay for the funding fee is a percentage of the home's purchase price, but the percentage varies. You can pay a lower percentage if you put money down on the purchase. You will also pay a lower fee if this is your first VA loan. The fees vary, but you will likely pay somewhere between 1.4% to 3.6%, and the amount is based on the price you pay for the house.

Ways to Pay the Fee

As a borrower, you can pay the fee in two different ways. First, you can pay it with cash when you close on the loan. The second option is to finance the fee in your loan. If you choose this option, it will increase your loan balance, which may result in higher mortgage payments.

Are you interested in applying for a VA loan? If so, gather your financial details and contact a lender. A lender can help you apply for the loan if you meet the required criteria.