As a veteran, you are eligible to secure 100% financing for a home purchase or refinance. The loan has flexible guidelines, making it easy for many veterans to qualify for it. In exchange for the no down payment requirement and flexible guidelines, the VA requires the payment of a funding fee.
The fee applies to every VA loan, but the amount you pay depends on the type of service you provided and if you put money down on the home. The most common borrower that served in the regular military will pay 2.15% of their loan amount for this fee. If you were to put between 5% and 10% down on the home, though, you could lower the fee to 1.5%. Those who served in the National Guard or Reserves, however, will pay 2.4% of the loan amount with no down payment.
On a $200,000 loan, a regular military veteran would owe $4,300 and a reservist would owe $4,800. That’s no small chunk change and this is before the closing costs. Luckily, you do have the option to roll the cost into your loan. You should just make sure you could afford the loan if you do because it will increase your total monthly payment.
Paying the Funding Fee
If you are going to roll the funding fee into your loan, you should make sure it makes sense to do so. Will you live in the home for the long term? If so, it may not make sense to roll the cost into the loan. You will pay interest on it for the next 30 years. That will increase the total cost you pay for the funding fee quite a bit.
If, on the other hand, you are only going to live there for the short-term, you can roll it in and pay the interest on the amount while you live in the home. When you sell the home and pay the loan off, you pay the fee off without paying any more interest. You didn’t take money out of your pocket to get the home and you didn’t pay excessive amounts of interest either.
How Rolling the Funding Fee in Affects Your LTV
Normally, when you add fees to your loan, you have to watch the value of the home. Most loan programs don’t allow you to borrow more than the home is worth. This is the case for the VA loan as well, except when it comes to the funding fee. You can roll the full amount of the funding fee into the loan without affecting the loan-to-value ratio.
For example, let’s say you agreed to pay $200,000 for a home. The appraiser comes back and says the home is worth exactly $200,000. You still wanted to roll the funding fee into the loan, though, which would give you a loan amount of $204,300, which is more than the home is worth. Luckily, you can as the VA fee doesn’t affect the LTV.
One thing to keep in mind though, is that you will enter the transaction upside down. In other words, you will owe more on the loan than the home is worth. Since it’s only a matter of a few thousand dollars in this case, it won’t be the end of the world. You will likely make that amount up fairly quickly given appreciation and the way you pay the principal on the loan down. It’s just important to know that going into it so that you don’t have any unpleasant surprises.
Rolling the VA funding fee into the loan is a great way to keep the loan affordable. Veterans that don’t have a lot of cash saved can still find a way to buy a home when they are out of the service. They may even be able to roll certain closing costs into the loan or receive gift money from a relative to help them get to the closing table with very little of their own money.