The Bottom Line Up Front

The VA funding fee is the only closing cost you can finance into a purchase loan.

At 2.15% of the loan amount for first-use, zero-down borrowers, financing the fee keeps cash to close lower at the cost of a higher balance and slightly higher monthly payment. Every other closing cost must be paid in cash, covered by a seller credit, or offset by a lender credit. The seller concession cap is 4% of the home's reasonable value, and ordinary closing costs the seller pays are not counted against it. Veterans receiving VA compensation for a service-connected disability, eligible surviving spouses, and active-duty Purple Heart recipients may be exempt from the fee entirely.

What You Can and Cannot Finance on a VA Purchase Loan

The fee is calculated on the base loan amount (purchase price minus any down payment) before the fee itself is added. The fee is never compounded.

When the fee is financed, the loan balance exceeds the purchase price by the fee amount.

Closing Costs Versus Seller Concessions

VA draws a line between ordinary closing costs and concessions. When the seller agrees to pay charges like the appraisal, title insurance, or origination fee, those are standard seller-paid closing costs and do not count against the 4% cap. Concessions are additional credits beyond those standard costs. VA examples of concessions include credits for the funding fee, debt payoff, and prepayment of hazard insurance.

Worked example: $400,000 reasonable value

Suppose the home's reasonable value is $400,000 and the seller agrees to pay closing costs plus the funding fee.

The seller pays standard closing costs without limit and applies $8,600 of the $16,000 concession cap to the funding fee. The remaining $7,400 in cap room can cover prepaids or other concession items.

Raising the price to cover costs

A common strategy is to offer a higher purchase price and ask the seller to credit back closing costs. If the home is worth $400,000 and you need $10,000 in credits, you might offer $410,000 with $10,000 in seller concessions. The home must appraise for at least $410,000 or the lender will not finance the higher price.

This does not add costs to the loan balance the way financing the fee does. It raises the entire loan amount. Your balance is $410,000 whether or not the seller credits exist. The seller nets the same $400,000 either way. The risk is that the appraisal does not support the inflated price. If it comes in lower, you renegotiate the price or cover the gap in cash.

Cash you still need before closing

Even when the fee is financed and the seller covers concessions, some cash is typically required: earnest money (held in escrow and applied at closing), any appraisal gap if the price exceeds the appraised value, and any costs the seller did not agree to cover. A lender credit can absorb some of these.

What happens if the appraisal falls short

Finance Versus Pay Cash: The Real Cost of the Funding Fee

The funding fee is computed on the base loan amount at the rate shown in the fee table. For a $400,000 purchase with first-use entitlement and zero down, the fee is $8,600 (2.15%). Here is what that decision costs at a 6.5% rate over 30 years.

[VA.gov] · Fee rates effective Apr 7, 2023; computed on this site's production math libraries

Financing the fee adds $54 per month to the payment and $10,970 in interest over the full term. If you sell or refinance within five years the additional interest is $2,712; within seven years, $3,742. The shorter you hold the loan, the less the financing decision costs.

Does financing the fee change the interest rate?

No. Financing the fee raises the loan balance, not the rate. The rate is set by the lender based on credit, market conditions, and loan terms. A higher balance means more interest paid over time, but the rate itself does not change because the fee is financed.

Is the funding fee negotiable?

The fee rate is determined from the loan fee table in 38 USC 3729(b)(2). Neither the lender nor the borrower can negotiate a lower rate. The only ways to reduce the fee are to make a down payment (5% or 10% thresholds lower the rate) or to qualify for an exemption.

Purchase, IRRRL, and Cash-Out: Different Financing Rules

Purchase and construction

The funding fee is the only cost that can be added to the loan balance. The rate depends on down payment and whether this is a first or subsequent use of the VA benefit. The fee calculator shows exact rates for every scenario.

IRRRL (streamline refinance)

An IRRRL carries a flat 0.50% funding fee regardless of use count. The fee can be included in the new loan amount. The IRRRL page covers what else qualifies.

Cash-out refinance

A cash-out refinance carries the same fee rates as a purchase (2.15% first use, 3.30% subsequent, zero down). The fee can be included in the new loan amount. The refinance page covers what else can be financed, rate tests, seasoning, and recoupment.

Funding Fee Exemptions

Several categories of borrowers owe no funding fee. If the Certificate of Eligibility shows an exemption, the fee never appears on the Closing Disclosure.

The Purple Heart exemption requires active-duty status. A Veteran who received a Purple Heart but has since separated does not qualify under the Purple Heart provision, though they may qualify under the disability-compensation provision instead. Full exemption details.

Retroactive Refund for a Later Disability Rating

If you paid the funding fee at closing and later receive a VA disability rating, you may be eligible for a refund. VA states: "The effective date of your VA compensation must be retroactive to before the date of your loan closing." Call your VA regional loan center to start the process.

Is the VA Funding Fee Tax Deductible?

The VA funding fee is classified as qualified mortgage insurance under IRC 163(h)(3)(E). Premiums for qualified mortgage insurance are treated as deductible mortgage interest. The deduction phases down by 10% for each $1,000 that adjusted gross income exceeds $100,000 ($500 and $50,000 for married filing separately). Public Law 119-21 section 70108 struck the prior sunset date, restoring the deduction for taxable years beginning after December 31, 2025.

VA-provided mortgage insurance is exempt from the prepaid allocation rule under IRC 163(h)(4)(F). If you pay the funding fee upfront at closing, the full amount is deductible in the year paid. Consult a tax professional to confirm your eligibility based on AGI and filing status.

Buyer-Broker Charges on a VA Loan

VA Circular 26-24-14, effective August 10, 2024, authorizes a temporary local variance that allows Veterans to pay reasonable buyer-broker charges. The circular is valid until rescinded; no subsequent circular has rescinded it as of this writing.