The VA home loan is the only widely available programme in the United States that combines no down payment with no monthly mortgage insurance. That combination is unusual enough that it is worth being precise about what it costs instead, because it does cost something: a one-time funding fee, set by statute, on a tier table that most eligible borrowers have never seen.
What the benefit actually is
The Department of Veterans Affairs does not lend money. It guarantees a portion of a loan made by an ordinary lender, and that guaranty is what allows the lender to accept no down payment without requiring private mortgage insurance. Three consequences follow:
- No down payment is required on a purchase within the appraised value, for a borrower with full entitlement.
- There is no monthly mortgage insurance, at any loan-to-value, ever.
- The lender’s risk is lower, which is the structural reason VA pricing tends to sit favourably. How favourably on any given day is a question for two live quotes, not for an article.
There is also a set of borrower protections that get less attention than they deserve: the VA appraisal includes Minimum Property Requirements, and the fee schedule limits what closing costs a veteran may be charged.
The funding fee, tier by tier
The fee is a percentage of the loan amount, set by 38 U.S.C. 3729 as amended. The rates in effect for loans closed from 1 April 2023 are in VA Circular 26-23-06:
- Purchase or construction, first use, less than 5% down — 2.15%
- Purchase or construction, first use, 5% to 9.99% down — 1.50%
- Purchase or construction, first use, 10% or more down — 1.25%
- Purchase or construction, subsequent use, less than 5% down — 3.30%
- Purchase or construction, subsequent use, 5% to 9.99% down — 1.50%
- Purchase or construction, subsequent use, 10% or more down — 1.25%
- Cash-out refinance, first use — 2.15%; subsequent use — 3.30%
- Interest Rate Reduction Refinance Loan (IRRRL) — 0.50%
- Exempt borrowers — 0%
The fee may be paid in cash at closing or financed into the loan. Almost everybody finances it, which means it also accrues interest for the whole term — a detail the percentage hides.
The cliff edge worth $7,500
Read the subsequent-use rows again. On a $400,000 purchase:
- First use, nothing down. 2.15% of $400,000 = $8,600.
- First use, 5% down. The base loan drops to $380,000 and the rate to 1.50%: $5,700.
- First use, 10% down. Base loan $360,000 at 1.25%: $4,500.
And for a veteran using the benefit a second time:
- Subsequent use, nothing down. 3.30% of $400,000 = $13,200.
- Subsequent use, 5% down. $380,000 at 1.50% = $5,700.
That is the same figure a first-time user pays at 5% down. Putting $20,000 into the purchase removes $7,500 of funding fee — before you count the interest that $7,500 would have earned over thirty years had it been financed, and before the smaller loan’s own interest saving. For a subsequent-use borrower with the cash available, the 5% threshold is the highest-return five percent in the programme, and nothing on the loan estimate draws your attention to it.
Check your own tier on the VA funding fee calculator.
What that does to the payment
Take the $400,000 purchase at a placeholder 6.5% over 30 years — a starting number, not a quote.
- First use, nothing down, fee financed. The amount amortised is $408,600 and principal and interest are $2,582.63 a month. There is no mortgage insurance line at all.
- First use, 5% down, fee financed. $385,700 amortised, $2,437.89 a month.
- Subsequent use, nothing down, fee financed. $413,200 amortised, $2,611.71 a month.
Compare the first of those with a low-down-payment conventional or FHA loan on the same house and the missing mortgage insurance line is typically worth $130 to $200 a month, every month, for a decade or more. That is where the VA benefit is actually paid out. The monthly payment calculator will put the three side by side.
Where the fee is not the whole story
The IRRRL. A streamline refinance of an existing VA loan carries a 0.50% fee and normally no appraisal and no income documentation. It is the cheapest refinance in American mortgage lending and it is still a refinance: it has closing costs, it has a break-even, and it can reset your term. Run it as a break-even before assuming a lower payment is a saving.
Cash-out. The cash-out fee is charged at the full purchase tier — 2.15% first use, 3.30% subsequent — with no down-payment discount available, because there is no down payment. On a large balance that is a substantial cost to weigh against whatever the cash is for.
Entitlement, not eligibility. These are different words. Eligibility is whether your service qualifies. Entitlement is how much guaranty you have available, and it is reduced while a prior VA loan is outstanding. A borrower with partial entitlement can still buy, but the county loan limit re-enters the calculation and a down payment may be required.
The myths worth retiring
- “VA loans take longer to close.” The VA appraisal has property requirements that occasionally surface repairs, which can add time on a particular house. Nothing about the programme sets a timeline, and nobody who does not control the appraiser’s diary should be promising one.
- “You can only use it once.” Entitlement is restorable, repeatedly.
- “VA loans are only for first-time buyers.” There is no such restriction.
- “Sellers refuse VA offers.” Some do, usually on the appraisal-condition point, which is a negotiating matter rather than a rule.
Before you apply
Get your Certificate of Eligibility, which establishes both eligibility and remaining entitlement. If you are receiving or claiming VA disability compensation, confirm the exemption before closing — the fee is refundable if the exemption is granted afterwards, but the refund process is slower than getting it right the first time. And if this is a subsequent use, price the 5%-down version of the loan alongside the zero-down one. On the numbers above that comparison is worth $7,500.