If you’re a veteran homebuyer getting ready to purchase a house with a VA loan, you’ve probably heard about benefits like no down payment and no private mortgage insurance (PMI).
But there’s another important advantage you should know about: the 1% rule on a VA loan. This rule sets a limit on how much your lender can charge you for originating (setting up) your loan, helping keep your closing costs in check.
For many veterans transitioning to civilian life, keeping costs affordable is a top priority.
In this guide, we’ll break down the 1% rule in simple, clear terms—no complicated jargon. We’ll also explain how you can use it to save money, give you real-life scenarios from fellow vets, and point you to resources if you have further questions. Let’s dive in!
What Does the 1% Rule Mean on a VA Loan?
When you hear “the 1% rule,” you might think it has something to do with your monthly mortgage payment. In reality, this rule deals specifically with the origination fee—the main fee your lender charges for processing and approving your VA loan.
- Capped at 1%: Under VA guidelines, your lender cannot charge more than 1% of the loan amount for origination. If you borrow $250,000, the maximum origination fee is $2,500.
- Separate from Other Costs: This cap does not include other closing costs (like appraisal or title fees) or the VA funding fee.
- Keeps Costs Fair: The Department of Veterans Affairs introduced this rule to prevent lenders from overcharging veterans.The 1% rule on a VA loan sets a strict limit on the lender’s origination fee—capping it at 1% of the total loan amount. This ensures veterans don’t get stuck with sky-high closing costs.
Real-World Example
If you’re buying a home in San Antonio for $300,000, your lender can’t charge an origination fee of $5,000. Instead, the 1% rule caps it at $3,000. That’s a direct savings of $2,000 you can keep in your pocket or use for other moving expenses.
Why the 1% Rule Exists for Veterans
One of the greatest benefits of your service is access to the VA home loan program. While most conventional loans might allow origination fees of 2% or even 3%, the VA wanted to ensure you wouldn’t be priced out of your hard-earned benefit.
- Protection: The VA designed the 1% rule to shield veterans from unfair or inflated lender fees.
- Affordability: When combined with no down payment and no PMI, the 1% cap keeps overall homebuying costs lower than many conventional mortgage options.
- Advantage: You served your country, and the 1% rule is part of the VA’s mission to serve you.
Real-World Example
Sarah, a veteran in North Carolina, caught her lender trying to charge 2% on a $200,000 loan (that’s $4,000). She reminded them of the 1% rule. The lender dropped the fee to $2,000—effectively cutting her origination cost in half.
What’s Covered Under the 1% Rule?
The 1% rule covers the lender’s origination fee, which is basically the cost of setting up and processing your VA loan. This can include:
- Loan Setup: The basic administrative tasks involved in creating your loan file.
- Underwriting: The lender’s evaluation of your income, credit, and eligibility.
- Processing: Gathering documents and verifying your information.
The 1% rule applies only to the lender’s origination fee. It does not include other common fees like appraisals, title insurance, or the VA funding fee.
Examples of Costs Not Covered by the 1% Rule
- Appraisal: Usually $500–$700, depending on your location.
- Title Insurance: Typically $1,000–$2,000, ensures your ownership claim is valid.
- VA Funding Fee: A separate cost paid to the Department of Veterans Affairs, generally between 2.15% and 3.3% of the loan amount (though this can vary).
- Prepaid Taxes and Insurance: Setting up escrow accounts for property taxes and homeowners insurance.
How the 1% Rule Works in Practice
Let’s say you’re looking at a $300,000 home. Under the 1% rule:
- The origination fee cannot exceed $3,000.
- You might still pay for an appraisal (outside the cap), plus other closing costs like title insurance, credit report fees, and the VA funding fee.
- Overall, your total closing costs can still be several thousand dollars, but the origination portion will never exceed 1% of your loan amount.
Real-World Example
Mike, a veteran in California, took out a $200,000 VA loan. His lender charged a $1,500 origination fee—less than 1%. He also paid $600 for an appraisal and $1,200 for title fees. In the end, the 1% rule kept the biggest lender fee (origination) comfortably under $2,000.
Fees Inside vs. Outside the 1% Rule
| Fee Type | Inside 1% Rule | Typical Cost | Outside 1% Rule | Typical Cost |
|---|---|---|---|---|
| Origination | Yes | $1,000–$3,000 | No | N/A |
| Appraisal | No | N/A | Yes | $500–$700 |
| Title Insurance | No | N/A | Yes | $1,000–$2,000 |
| VA Funding Fee | No | N/A | Yes | $4,300–$9,900 |
| Prepaid Taxes/Ins. | No | N/A | Yes | $1,000–$3,000 |
Key Takeaway: Only your lender’s origination fee is restricted by the 1% rule. Everything else falls outside of that cap.
Steps to Use the 1% Rule to Your Advantage
Keeping your VA loan costs down starts with understanding your rights under this rule. Here’s a practical, step-by-step process:
Step 1: Request a Loan Estimate
Once you apply with a VA-approved lender, they must provide a Loan Estimate within three business days. Look for a line labeled “Origination Fee” (or something similar) under “Loan Costs.”
Tip: Make sure the fee doesn’t exceed 1% of your total loan amount. If you’re borrowing $250,000, expect a fee under $2,500.
Step 2: Check the Origination Fee
Review the origination fee line item carefully. If you see something like $4,000 on a $300,000 loan, that’s over the 1% limit ($3,000 in this case).
Veteran Story: John noticed a $4,000 fee on his $300,000 Loan Estimate. He pointed out the VA’s 1% rule, and the lender reduced it to $3,000.
Step 3: Shop Multiple Lenders
Not all lenders are the same. Some may charge the full 1%, while others might only charge 0.5%. Gather at least 3–5 quotes from well-known VA lenders—like Navy Federal, Veterans United, or reputable local banks.
Compare: Even a 0.5% difference can save you $1,250 on a $250,000 loan.
Step 4: Verify at Closing
Right before you officially close on your home, you’ll receive a Closing Disclosure (final paperwork). Double-check the origination fee again to ensure it matches what you agreed upon.
Action: If the fee appears higher than 1%, do not sign. Request an immediate correction. Remember, the VA’s rules are on your side.
Step 5: Negotiate if Needed
Even if the fee is at or below 1%, there’s no harm in asking if they can reduce it further.
Pro Tip: Lenders often prefer to keep a good customer happy than lose you to a competitor. If one lender charges 1% and another charges 0.75%, let them know. They might match or beat the lower fee.
1% Rule Examples by Loan Size
| Loan Amount | 1% Cap | Sample Origination Fee | Other Closing Costs |
|---|---|---|---|
| $200,000 | $2,000 | $1,500 | $600 appraisal + $1,200 title |
| $300,000 | $3,000 | $2,500 | $700 appraisal + $1,800 title |
| $400,000 | $4,000 | $3,000 | $800 appraisal + $2,500 title |
Note: Origination fees can be less than the cap, so always shop around!
Exceptions to the 1% Rule
Most VA loans will follow the 1% rule strictly. However, there are a few scenarios to be aware of:
Flat Fee Option
Instead of charging 1%, some lenders may opt for a flat fee, like $1,000–$1,500. This can work in your favor if you’re taking out a smaller loan—say, $100,000.
Example: If the lender charges a flat $1,200 fee on a $150,000 loan, that’s less than 1% ($1,500).
Discount Points
These are optional fees you can pay to get a lower interest rate. For instance, you might pay 0.5% (or $1,250 on a $250,000 loan) to reduce your rate. This does count toward overall origination costs under VA guidelines, but the VA allows certain exceptions for these points.
Always confirm with your lender how points affect your origination charges.
Construction Loans
One-time close construction loans or other specialized VA loans might have different fee structures. Always ask about fees early in the process.
How the 1% Rule Saves You Money
If you’ve been comparing mortgage options—like conventional, FHA, and VA—you’ll notice the VA loan has perks that can add up to thousands of dollars in savings:
- Lower Origination Fee: Without the 1% rule, a lender could charge 2% or more. On a $250,000 loan, that might be $5,000 or above. The rule keeps it to $2,500 or less.
- No Down Payment: Qualifying veterans typically pay $0 down, compared to the 3–5% down usually required by conventional loans.
- No Monthly PMI: On a conventional loan, PMI might cost $100–$200 per month until you have enough equity in your home.
The 1% rule can save veteran homebuyers thousands of dollars by capping the largest lender fee—leaving more of your money for moving expenses, emergency funds, or home improvements.
Tips to Maximize the 1% Rule Benefit
Here are a few more strategies to squeeze every penny out of your VA loan advantage:
- Ask Upfront: Be proactive. Before going through a full application, ask, “Do you charge the full 1% or less?”
- Compare Quotes: Get multiple estimates. Even a small fee difference can mean significant savings over the life of your mortgage.
- Look for VA Exemptions: If you have a service-connected disability rating, you may be exempt from the VA funding fee. That can save you several thousand dollars right off the bat.
- Review Documents Carefully: Always check the Loan Estimate and Closing Disclosure to ensure fees haven’t inched above the limit.
Pro Tip – According to the Department of Veterans Affairs, over 25 million veterans and service members are potentially eligible for VA home loan benefits, but not everyone takes advantage of these money-saving perks. Make sure you’re not leaving any of your benefits on the table.
The Bottom Line
By keeping your origination fee capped at 1% of the loan amount, the VA ensures you enjoy a truly fair homebuying process.
Remember to examine your Loan Estimate and Closing Disclosure, compare multiple lenders, and remain vigilant for any attempts to exceed the cap.
If you have a service-related disability, check whether you qualify for a funding fee exemption.
Armed with this knowledge, you can confidently move forward with your VA loan—and secure the home you deserve.
FAQs About the 1% Rule on a VA Loan
1. What does the 1% rule limit on a VA loan?
It caps the lender’s origination fee at 1% of the total loan amount. For example, on a $250,000 loan, that means the fee can’t exceed $2,500.
2. How much can the origination fee be under the 1% rule?
Maximum is 1%—so on a $200,000 loan, $2,000 is the limit. However, many lenders charge less than 1%, especially in competitive markets.
3. Does the 1% rule include the VA funding fee?
No. The VA funding fee (usually 2.15%–3.3% for first-time use, depending on service category and down payment) is separate from the origination fee. It goes directly to the VA.
4. Can I negotiate the origination fee under the 1% rule?
Absolutely. Even if the fee is already at 1%, you can ask if they can reduce it to 0.5% or 0.75%. Comparing multiple lenders strengthens your negotiating power.
5. What if my lender charges over 1% origination?
You can call them out on it and refer to VA guidelines. Ask for a corrected Loan Estimate or Closing Disclosure. If they refuse, consider switching lenders.
6. Are there exceptions to the 1% rule?
Yes. Some lenders might charge a flat fee instead of a percentage, and discount points can factor into your total closing costs. Also, specialized loans like VA construction loans may have different fee structures.
7. How do I verify the 1% rule is followed?
Check your Loan Estimate and Closing Disclosure thoroughly. If your loan is $250,000, the origination fee shouldn’t exceed $2,500. If it does, you have grounds to dispute it.
8. Does the 1% rule apply to VA refinances?
Yes, it generally applies to VA streamline (IRRRL) and cash-out refinances too. The lender’s origination costs are still capped to protect your interests.
