If there’s one benefit of being a veteran you should not overlook, it’s the VA home loan benefit. The VA loan provides you with 100% financing. It also has very
flexible guidelines. Better yet, you don’t have to pay mortgage insurance.
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The one fee you do pay is the VA Funding Fee. The VA does a great job of keeping this fee affordable for veterans, though. You even have the option to roll the cost into your loan. If you choose to pay it at the closing, though, you may get the benefit of writing it off on your taxes.
Who Pays the VA Funding Fee?
First, let’s look at who pays the VA funding fee and how much they pay. Basically, anytime you take out a VA loan, whether it’s your first, second, or fifth loan, you pay the funding fee. It’s how the VA is able to continue providing these loans. The VA does not actually fund the loan; instead, they guarantee it. They pay the lender back 25% of the amount they lose. This is how lenders are able to give slightly risky borrowers 100% financing.
How Much Do you Pay?
How much you pay for your funding fee depends on several factors.
The average veteran that served in the military pays 2.15% of the loan amount. The exception to this rule is borrowers that use the
Interest Rate Reduction Refinance Loan option. They only pay 0.5% of the loan amount, but they can only refinance the outstanding principal balance of their loan plus the new funding fee.
Regular military personnel can knock down how much they pay for the VA funding fee by making a down payment. Regular military personnel that put down between 5 and 10% of the purchase price lower their funding fee to 1.5% and those putting down 10% pay just 1.25% in a funding fee.
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serving in the Reserves or National Guard, however, pay a higher funding fee. With no down payment, they pay 2.4% in a funding fee. With a 5-10% down payment, they pay 1.75% and with a 10% down payment, they pay 1.5% in a funding fee.
This may all sound like a lot, after all, just a regular purchase of a $200,000 home with no down payment can cost a borrower as much as $4,300, but there’s good news – you can deduct it on your taxes.
How to Deduct the VA Funding Fee on Your Taxes
There’s one stipulation you must meet in order to deduct the VA funding fee on your taxes – you have to pay it upfront. If you roll it into your loan amount, you can only deduct the small portion of the fee that you paid that year.
If you want to take full advantage of the tax benefit, you need to pay the entire fee in cash at the closing and have the proof that you did so. Your closing statement is usually enough proof that you paid the fee and are now eligible to deduct it. You may only deduct the fee during the year that you paid it, though. For example, if you paid the fee in 2018, you can only deduct it when you do your 2018 taxes.
The VA loan has many benefits, which get even better with the ability to deduct the VA funding fee. With 100% financing and low closing costs, it’s an affordable loan program for those that served our country.
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