What Is the VA Funding Fee?

The VA funding fee is a mandatory charge for most VA home loans, including purchase and refinance. It’s calculated as a percentage of your total loan amount—typically ranging between 1.4% and 3.6%. Factors that determine this percentage include:

• Your military status (Active Duty, Reserve, or National Guard)
• Whether it’s your first VA loan
• The size of your down payment (if any)

The collected fee helps keep the VA loan program running, ensuring future veterans and service members can access VA mortgage benefits. If you pay the fee at closing or roll it into your loan, you might be able to deduct it from your taxes under the right circumstances.

VA Funding Fee Rates

Is the VA Funding Fee Tax Deductible?

In most cases, the VA funding fee is tax deductible as a form of prepaid mortgage interest, often reported as “points.” The Internal Revenue Service (IRS) typically allows this deduction if:

• You itemize deductions (rather than taking the standard deduction).
• Your VA loan is secured by your primary residence or a second home.
• You paid the fee at closing or financed it into your loan amount.

Because tax situations vary, always consult a qualified tax professional to confirm your personal eligibility.

When Can You Claim the VA Funding Fee Deduction?

You generally claim the VA funding fee deduction in the tax year the fee is paid if you pay it upfront at closing. If you roll it into the loan, you may need to spread out (amortize) the deduction over the life of the loan. Some tax advisors, however, allow for a full deduction in the first year—so it’s wise to get personalized guidance.

For VA Interest Rate Reduction Refinance Loans (IRRRLs), the same rules apply. The funding fee is typically 0.5%, and if you meet the requirements, it can also be deducted.

Who Qualifies for the Deduction?

Not every borrower can deduct the VA funding fee. To qualify, you must:

• Itemize your deductions on Schedule A of Form 1040.
• Use the property as your primary or second home (not an investment property).
• Be the person legally obligated to pay the mortgage.

If you have a service-connected disability that entitles you to waive the funding fee, there’s no fee to deduct. And if you’re married filing jointly, both spouses can benefit if both names are on the mortgage.

How to Claim the VA Funding Fee Deduction

1. Gather Your Documents: Locate your Closing Disclosure or HUD-1 Settlement Statement. The VA funding fee amount should be listed.
2. Report on Schedule A: If you paid the fee in full at closing, you might list it as “Mortgage Interest” or “Points.” If you financed it, consult with a tax professional to determine if you should amortize.
3. Submit Your Return: File Form 1040 with Schedule A attached. Keep all records for at least three years in case of an audit.
4. Consult a Tax Professional: For complex situations, such as partial deductions or refinanced loans, a CPA or enrolled agent can help ensure accuracy.

Itemizing vs. Standard Deduction

To deduct your VA funding fee, you must itemize your deductions on Schedule A. If your total itemized deductions (including mortgage interest, property taxes, and other eligible expenses) are less than the standard deduction for your filing status, you won’t see a benefit from itemizing.

Always check the IRS official guidelines for the current standard deduction amounts. If your itemized expenses exceed the standard deduction, itemizing might save you more money.

VA Funding Fee vs. PMI

When comparing the VA funding fee with Private Mortgage Insurance (PMI) on conventional loans, there are two big differences:

• One-Time vs. Monthly: The VA funding fee is a single, upfront cost (often financed), whereas PMI is typically paid monthly.
• Deductibility: The VA funding fee can be deducted if you itemize, whereas the tax deduction for PMI is not always extended. Check current IRS rules to see if PMI deductions are allowed for the tax year you’re filing.

Common Misconceptions

Myth 1: You can always deduct the entire VA funding fee in the first year.
Reality: Many assume the full VA funding fee is immediately tax-deductible in the year the loan is closed. However, if you chose to finance the VA funding fee into the loan (rather than paying it upfront), the IRS may require you to amortize the deduction over the life of the loan. This means you can only deduct a portion of the fee each year. Always consult a tax advisor to determine the correct method for your situation.

Myth 2: Every VA borrower is required to pay the VA funding fee.
Reality: While most veterans do pay the VA funding fee, some are exempt. Veterans with a service-connected disability, Purple Heart recipients, and surviving spouses eligible for VA loan benefits may qualify for a full exemption. If you’re unsure of your status, check your Certificate of Eligibility (COE) or talk to your lender before closing.

Myth 3: The VA funding fee is tax-deductible even for rental or investment properties.
Reality: The IRS only allows the deduction of the VA funding fee as mortgage interest if the property is your primary residence or second home. If you’re using a VA loan to purchase a rental or investment property—which is rare and usually not permitted under VA guidelines—you likely won’t qualify for the deduction. Always make sure your usage of the home meets IRS and VA definitions for owner-occupancy.

Myth 4: VA funding fee exemptions apply automatically.
Reality: Even if you’re eligible for an exemption, it’s not always applied automatically. If your disability claim is pending at the time of closing, you may pay the fee upfront and later be eligible for a refund once your disability rating is confirmed. In this case, you may need to file an amended tax return if you initially deducted the fee and are later reimbursed.

Myth 5: VA funding fees are deductible regardless of loan type.
Reality: Only VA loans used to purchase or improve a primary residence or second home qualify for the deduction. IRRRL (Interest Rate Reduction Refinance Loan) fees may also qualify, but cash-out refinance funding fees may be treated differently, depending on how the funds are used.

Tips to Maximize Your VA Loan Benefits

• Compare Lenders: Shop around for competitive interest rates and closing costs.
• Make a Down Payment: Even a small down payment can lower your VA funding fee rate.
• Refinance Smartly: If rates drop, a VA IRRRL may reduce monthly payments with a small 0.5% funding fee.
• Review Tax Changes: Tax laws evolve; check annually for any updates affecting mortgage interest deductions.

FAQs About VA Funding Fee Tax Deductible

1. Can I deduct the VA funding fee if I take the standard deduction?

No. You must itemize your deductions to claim the VA funding fee as a tax deduction.

2. Is the VA funding fee deductible for a refinance?

Yes. The same deduction rules apply to VA streamline refinances (IRRRLs) as long as you itemize and use the home as a primary or second residence.

3. What if I’m exempt from the VA funding fee?

If your VA disability rating exempts you from paying the fee, there’s nothing to deduct. However, you can still deduct other eligible mortgage interest if you itemize.

4. Can I deduct the funding fee if I roll it into the loan?

Yes, but you may need to amortize it over the life of the loan. Consult a tax professional for guidance.

5. Does the VA funding fee deduction apply to investment properties?

No. It only applies to mortgages secured by your primary residence or a second home.

6. Where do I report the VA funding fee on my taxes?

You typically report it on Schedule A (Form 1040), under “Points” or “Mortgage Interest.” Your closing documents will show the amount.

7. Is the VA funding fee refundable?

In certain cases (e.g., a retroactive disability rating), you may be eligible for a funding fee refund. Contact your lender or the VA for details.

8. How do I confirm the exact funding fee amount?

Check your Closing Disclosure or HUD-1 Settlement Statement. The VA funding fee is usually listed as a separate line item.