Since May is Military Appreciation month, I have decided to focus on a few tips for Processing and Underwriting VA loans so that we can be better armed to assist our veteran borrowers.

For this round, I want to focus on explaining how the borrower’s down payment can directly impact the amount of their funding fee. The VA funding fee is a one-time payment that the Veteran, service member, or survivor pays on a VA-backed home loan. This fee is the VA’s version of mortgage insurance and helps to lower the cost of the loan for the US taxpayer, as well as helping to mitigate risk for the lender. The funding fee may be paid upfront in “cash”, or may be financed into the loan.

While many of our veteran borrowers are exempt from paying the funding fee, some are not.

The most important step lenders should take when structuring their veteran’s loan, is to pull a Certificate of Eligibility. While I will not be going into detail on how to do this here (see additional posts or please reach out for guidance), the steps to obtaining your borrower’s COE are easy and provide a wealth of information that ensures the loan is set up correctly prior to submission into Underwriting. Two of the main components of the COE are:

–       Determining if your borrower is subject to paying a funding fee or is exempt

–       Determining if the veteran has used their VA home loan benefits before

These two points are integral in calculating the borrower’s funding fee.

If we look at Table 1, noted in VA Circular 26-19-23, we see the larger the down payment, the smaller the funding fee (this makes sense – the more “skin in the game” the less insurance the loan needs):

Table 1

It is important to note these reductions apply to purchase and construction transactions only. The revised directives from VA, published in 2019, also eliminated the variance that used to be associated with the service type (active duty vs. reserves vs. national guard).

Discussing your borrower’s long and short-term goals is hugely helpful when it comes time to structure their loan. If the veteran has a large amount of money saved up or is looking to purchase in a competitive market (which is likely anywhere in the continental U.S. of late), a larger down payment may not only give them an edge in winning the contract but can reduce the impact on the total loan amount, thus lowering their monthly mortgage payment; it may even allow them to pay for the funding fee in cash, eliminating its inclusion in the monthly PITI altogether.

The key is to provide your veteran borrower with all the details of their specific situation so you can assist them in figuring out what works best for them and their family, both now, and in the future. Understanding how these guidelines are applied and knowing how to tweak a scenario to help provide an edge to our veterans, so they can get into their dream home, is an important part of our duty to our military families.  

As always, to our military veterans – thank you for all you do!