VA funding fee: first use vs later use

This is a plain explainer for buyers and refinancers who already know they can get a Certificate of Eligibility (COE). It will not tell you which fee tier you fall in. Your COE and lender do that from your file. It will show you which questions to ask so the quote you get matches your situation.

What the funding fee is

The VA funding fee is a one-time payment on a VA-backed or VA direct home loan. The VA says the fee helps lower the cost of the program for taxpayers, because VA loans do not require a down payment or monthly mortgage insurance. You pay it when the loan closes, either by financing it into the loan or by paying it in cash at closing.

The fee is based on the type of loan and the loan amount. On some loan types, it also depends on whether this is your first VA loan or a later one, and on how much you put down.

First use vs later use on a purchase

For a VA-backed purchase or construction loan, first use and later use are separate tiers when your down payment is under the VA's lower threshold. Once your down payment reaches the VA's middle or higher threshold, first use and later use share the same fee tiers. In plain words: the first-vs-later gap matters most when you put little or nothing down. Putting more down can close that gap.

"First use" means you have not used a VA-backed or VA direct home loan before. "Later use" (the VA calls it after first use) means you have. One exception is worth knowing: if your only prior VA loan bought a manufactured home that was not permanently affixed, the VA still treats you as first use for the funding fee.

A larger down payment can also change which fee tier you sit in, even on a first use. So when you compare quotes, ask the lender to show the fee both as first use and as later use if your COE status is unclear, and to show how the fee changes if you put more down.

Cash-out refinance is different

On a VA cash-out refinance, first use and later use are also different tiers. Down payment does not change the cash-out funding fee the way it can on a purchase. If you are refinancing and taking equity out, ask the lender which use status your COE shows and what fee that status produces on the loan amount you want.

Loan types where first vs later does not change the fee

Not every VA loan type splits first use from later use. The VA's funding fee charts show the same fee for first and later use on interest rate reduction refinancing loans (IRRRL), manufactured home loans that are not permanently affixed, loan assumptions, and Native American Direct Loan (NADL) purchase and refinance. On those, the first-vs-later question is not what drives the fee.

If you are choosing between an IRRRL and a cash-out refinance, the funding fee rules are one of several differences. Ask your lender which product you are on and which chart applies.

How you pay, and when the fee does not apply

You can finance the funding fee into the loan or pay it at closing. Financing keeps cash in your pocket on closing day and makes the loan larger. Paying cash keeps the loan smaller. Ask your lender to show both ways on the same Loan Estimate so you can see the trade.

Some borrowers do not pay the fee at all. The VA lists exemptions for certain disability compensation, Dependency and Indemnity Compensation for a surviving spouse, a proposed or memorandum rating before closing, and Purple Heart evidence for an active-duty member. We cover the paperwork side in VA funding fee exemption checks and the refund path in VA funding fee refund after a disability claim. If you think an exemption fits, raise it before you lock a quote.

On a purchase, the funding fee is the only charge you can finance into the loan amount. Other closing costs are paid at closing, by you or through seller credits. The VA purchase loan page also notes that you may need to pay the funding fee as part of buying with VA.

What to ask your lender

Bring these questions to the quote call:

• Does my COE show first use or later use for the funding fee?
• For this purchase price and down payment, which fee tier applies?
• What happens to the fee if I put more down?
• Can I finance the fee, and how does that change cash to close?
• Does any exemption apply to my file?

Lay the answers next to the Loan Estimate. Compare the same lines across quotes so you are not mixing a financed fee with a cash fee.

FAQ

Does a prior VA loan always mean a higher funding fee?

Not always. On a purchase, once your down payment reaches the VA's middle or higher threshold, first use and later use share the same fee. On an IRRRL and several other loan types, first vs later does not change the fee at all. Ask which chart applies to your loan type.

If I paid a funding fee before, do I pay again?

Yes, when you use the benefit again on a loan type that charges the fee, unless an exemption applies. Prior payment does not wipe out a later-use fee. Your COE and lender confirm the status.

Can the seller cover my funding fee?

The VA lets buyers and sellers negotiate who pays many closing costs, and sellers can give credits. Seller concessions (including a credit for the funding fee) are capped against the home's reasonable value. Your lender and the VA Notice of Value show that number for your deal.

One thing to do

Sources: VA, "VA funding fee and loan closing costs"; VA, "Purchase loan"; BankPricer, "VA funding fee exemption checks"; BankPricer, "VA funding fee refund after a disability claim".

Jeff Shin, Mortgage Loan Originator, NMLS #1041652. Chicago. Equal Housing Lender. Not a commitment to lend.