Understanding the VA Funding Fee with Merchants Home Lending

VA loans offer incredible homeownership benefits for eligible military members and veterans. But one cost that often catches borrowers by surprise is the VA funding fee. While it's a small percentage of the total loan amount, it can add up quickly—so understanding how it works is key.

At Merchants Home Lending, we’re committed to helping you navigate every part of the VA loan process—including what to expect with the VA funding fee.

What Exactly Is the VA Funding Fee?

The VA funding fee is a one-time charge required by the Department of Veterans Affairs (VA) for most VA-backed home loans. This fee helps fund the program and reduces the burden on taxpayers, enabling the VA loan benefit to remain available to future generations of service members.

Borrowers who use a VA loan without a down payment typically pay 2.15% of the loan amount for their first home purchase. If you're using the VA loan benefit again, that fee increases to 3.3%—unless you make a down payment of 5% or more, which lowers the fee.

Why Does the VA Funding Fee Exist?

The VA doesn’t directly issue home loans. Instead, it guarantees a portion of loans made by private lenders like Merchants Home Lending. This guarantee gives lenders the confidence to offer loans with no down payment, no mortgage insurance, and flexible credit guidelines.

To keep this benefit sustainable, the VA charges the funding fee. It acts as a form of self-insurance for the program—ensuring that if a borrower defaults, the VA can cover part of the lender's loss.

VA Funding Fee vs. Traditional Mortgage Insurance

The VA funding fee is sometimes mistakenly referred to as VA mortgage insurance or PMI. However, there are key differences:

Unlike traditional PMI, the VA funding fee is typically paid once at closing or rolled into the loan. There's no monthly mortgage insurance, saving borrowers thousands over time.

2025 VA Funding Fee Rates

Here’s a breakdown of the current VA funding fee percentages for purchases and construction loans as of 2025:

VA Purchase and Construction Loan Funding Fee Chart

VA Funding Fee for Refinance Loans in 2025

If you're refinancing with a VA cash-out refinance, here’s what to expect:

• First-time use: 2.15%
• Subsequent use: 3.3%

For borrowers using a VA IRRRL (Interest Rate Reduction Refinance Loan), also known as a VA Streamline Refinance, the funding fee is just 0.5%—regardless of whether you've used a VA loan before.

How to Pay the VA Funding Fee

At Merchants Home Lending, we’ll walk you through your options for handling the VA funding fee. Here are a few common approaches:

• Pay it upfront at closing.
• Finance it into the loan, increasing the loan amount and monthly payments slightly.
• Ask the seller to cover it as part of seller concessions (within VA limits).

Important: While seller-paid concessions can cover the VA funding fee, they must not exceed 4% of the loan amount (excluding standard closing costs).

Are There VA Funding Fee Exemptions?

Yes—many borrowers are exempt from paying the VA funding fee. You may qualify if:

• You receive VA disability compensation for a service-connected disability.
• You’re eligible for disability pay but receive retirement or active-duty pay instead.
• You’re a surviving spouse of a veteran who died in service or from a service-connected disability.
• You’re an active-duty service member awarded the Purple Heart before closing.

Check your Certificate of Eligibility (COE) to see if you're exempt. If your status changes after closing (for example, a disability claim gets approved), you may be eligible for a refund.

Can You Get a Refund on the VA Funding Fee?

Absolutely. If your disability compensation was retroactively approved and the effective date is before your loan closing, you can request a refund of the funding fee. The refund will either:

• Be applied as a principal reduction on your loan, or
• Be returned directly to you (if you paid the fee in cash).

Contact Merchants Home Lending to help file the necessary paperwork with the VA and track your refund request.

VA Loans Still Offer Exceptional Value

Despite the funding fee, a VA loan remains one of the most affordable and flexible home loan programs available to eligible military borrowers.

Key benefits of a VA loan through Merchants Home Lending include:

• Zero down payment
• No monthly mortgage insurance
• Competitive interest rates
• Flexible credit requirements
• Support from VA loan experts

Ready to Start Your VA Loan Journey?

Whether you're a first-time buyer, upgrading to a new home, or refinancing with a VA loan, Merchants Home Lending is here to help every step of the way.

Our VA loan specialists are ready to guide you through eligibility, funding fee questions, and the best financing strategies for your unique needs.

📞 Call Us Today at (800) 246-9518
📩 Or Apply Online to get started on your VA loan with confidence.

Frequently Asked Questions (FAQs) About the VA Funding Fee

1. Is the VA funding fee refundable?

Yes, the VA funding fee may be refundable if you were eligible for an exemption at the time of closing but had not yet received confirmation (such as a pending disability rating). If your exemption is approved retroactively, Merchants Home Lending can help you apply for a refund through the VA.

2. Can the VA funding fee be rolled into the loan?

Yes, you can choose to finance the VA funding fee into your total loan amount instead of paying it upfront at closing. This allows you to reduce out-of-pocket expenses, though it will slightly increase your monthly mortgage payments.

3. Who is exempt from paying the VA funding fee?

Veterans and service members with a service-connected disability, surviving spouses of veterans, and Purple Heart recipients on active duty may be exempt. Check your VA Certificate of Eligibility (COE) or speak with a Merchants Home Lending VA loan specialist to verify your exemption status.

4. Does the VA funding fee replace mortgage insurance?

Yes, in a way. The VA funding fee serves a similar purpose as mortgage insurance, helping offset the cost of default risk to the VA. However, VA loans do not require monthly mortgage insurance premiums, making them more affordable in the long term.

5. How much is the VA funding fee in 2025?

As of 2025, first-time VA homebuyers with less than 5% down will pay 2.15% of the loan amount. Repeat VA loan users will pay 3.3% with less than 5% down. The fee decreases if you put down 5% or more. For streamlined refinances (IRRRLs), the fee is just 0.5%.