Can a Seller Pay the Funding Fee on a New Construction VA Loan?

The Quick Read: Yes. On new construction the seller is usually the builder, and VA allows a builder to pay your funding fee. The payment counts as a seller concession, and concessions are capped at 4% of the home’s VA-established reasonable value.

That is the short version. The details matter more on a home that is not built yet, because the value, the contract and the timing all work differently. This article walks through each piece.

What Does VA Actually Say About Who Can Pay the Fee?

VA lets someone other than the borrower pay the funding fee. The VA Home Loan Guaranty Buyer’s Guide says the fee can be paid by the seller, the lender, or any other party on your behalf. That includes a builder or a gift from a relative.

Two limits sit on top of that. First, the fee itself is set by law. A seller can pay it. A seller cannot waive it. Second, the payment is a concession, and VA prohibits excessive concessions.

If you want to read VA’s own words on the fee and closing costs, start with the VA.gov funding fee and closing costs page. The rules for lenders sit in Chapter 8 of the VA Lenders Handbook.

How Big Is the Fee You Are Asking Them to Cover?

The fee depends on your down payment and whether this is your first use of the benefit. Across the wholesale programs Lendmire places VA loans with, the schedule on a purchase looks like this, subject to lender guidelines and full file review. See the VA loan programs page for the broader picture.

Veterans receiving compensation for a service-connected disability, and the other exempt groups, owe nothing. If that is you, skip the negotiation over the fee entirely.

Notice the subsequent-use row. A 3.3% fee with little down is the largest item a builder could cover. It also eats the most room under the cap, which matters in a moment.

What Counts Toward the 4% Cap?

Concessions count. Ordinary closing costs do not. That split is the heart of how a lender sorts a builder’s offer.

The funding fee is often the biggest single item in the concession column. A builder who offers to “pay your closing costs” may be mixing both buckets in one promise. Ask the lender to sort each item before you sign anything.

One more wrinkle. Many lenders apply a blanket cap of their own across all seller-paid items. VA’s rule is the 4% on concessions. A lender’s tighter limit is that lender’s policy, not VA’s, so ask which one you are dealing with.

4% of What? Price or Value?

The cap is measured against the home’s reasonable value, not the contract price. VA sets that value in a document called the Notice of Value (NOV). Some web pages loosely say “loan amount” or “purchase price.” Those pages are inconsistent with VA’s wording.

This has a practical effect. If the NOV comes in below the contract price, the cap shrinks with it. Run the cap on the NOV, not on the number in the builder’s brochure.

Where New Construction Works Differently

A resale deal is a finished house with a finished appraisal. A new build adds steps. Here is the order they usually run in, based on VA’s published process and how these files move through the wholesale programs.

1. Eligibility first. Your lender confirms your certificate of eligibility (COE), the VA document that decides whether you qualify and how much entitlement you have.

2. The contract. Get any builder-paid items written into a signed addendum. Disclose them to your lender at pre-approval, not at the closing table.

3. The appraisal. For proposed construction, the appraisal is based on plans and specifications if it can be completed before the foundation is done. VA then issues the NOV.

4. The builder’s VA ID. A builder needs a valid VA builder ID before VA will issue an NOV on new or proposed construction. Ask for it on day one. A builder without one stalls the file.

5. Sorting the credits. The underwriter classifies each builder-paid item as a concession or an ordinary closing cost, then checks the total against the cap.

The valuation step is the one most buyers miss. On a home that does not exist yet, the reasonable value comes from plans, not from a walk-through. A builder who prices high for the area can leave you with an NOV under the contract price. That shrinks your cap and may leave you covering the gap.

When Is the Fee Due on a Construction Loan?

Timing depends on the loan structure. VA’s Circular 26-18-7 covers both common setups:

• One-time-close loan. One closing covers construction and the permanent loan. The fee is due to VA after loan closing, on a timeline that follows VA’s requirements and varies by file and lender. It is not tied to starting or finishing construction.
• Two-time-close loan. The first loan, for the construction phase, is not a VA loan. The fee is due after closing on the VA permanent loan, with timing that varies by file and lender.

So the common belief that the fee comes due when construction ends is wrong for a one-time-close loan. A builder who agrees to pay needs to know which structure you are using.

Here is the part buyers often confuse. Some lenders simply do not fund a VA construction phase at all. Others will refinance a construction loan into a VA loan afterward. Ask early which path your lender supports, because it changes the whole plan for a custom build compared with a builder’s finished home.

Builder Costs That Are Not the Funding Fee

Keep these separate. They are different line items with different rules, again per Circular 26-18-7.

• Interest during construction and the fees a builder pays on its own interim loan stay with the builder. They cannot be charged to you.
• A lender may charge a construction fee of up to 2% on top of the 1% origination charge. That applies only when 51% or more of the loan proceeds are paid out during construction.

A builder-paid funding fee does not change either of those. Do not let a sales office blur them together.

Is Asking the Builder to Pay the Right Move?

Sometimes. It depends on what you need most. Here is how the four options compare.

Three trade-offs deserve a straight look.

Cash to close. A builder-paid fee removes a major cash item. If you are tight on savings, that helps.

Cap room. The fee uses room that could go to other things, like prepaids or a buydown. Pick the use that helps your file most. A buyer with a high debt-to-income ratio may get more from a different concession.

Builder pricing. Some builders raise the price to offset what they give. If the price rises, check that the NOV supports it. A credit that comes with a higher price may just move money around.

A simple scenario helps. Say you are a first-use veteran putting 3% down on a new build. Your fee is higher than it would be with a larger down payment, though it is not the highest tier, which applies to subsequent use. A builder covering it takes a large item off your closing costs, but it also uses a big slice of the 4% cap. If the builder also offers a buydown, you may hit the cap and need to restructure before closing. A veteran with 10% down faces a much smaller fee, and the cap rarely becomes a problem. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

What Happens If Concessions Go Over 4%?

Concessions above 4% of reasonable value are excessive, and VA prohibits them. The lender has to restructure the deal before closing can clear. Typical fixes include trimming a concession, shifting a cost to you, or renegotiating price.

Build in room. If your NOV comes in lower than hoped, a package that fit the cap on paper may not fit anymore.

Common Myths

“The builder can waive the fee.” No. The fee is statutory. Someone pays it unless you are exempt.

“A seller-paid fee is just a closing cost.” It counts toward the 4% cap.

“The 4% covers every seller-paid item.” It covers concessions. Ordinary closing costs sit outside it, though many lenders apply their own blanket limit anyway.

“The cap is 4% of the loan.” VA measures it on reasonable value.

“I pay the builder’s construction interest.” The builder carries that cost.

Questions to Ask Before You Sign

• Does the builder hold a valid VA builder ID?
• Will the lender fund the construction phase, or only the permanent loan?
• Is my loan one-time-close or two-time-close?
• Does the lender apply its own cap below VA’s 4%?
• What do you count as a concession, and what is an ordinary cost?
• What happens to my cap if the NOV comes in under the price?

If you want to see how seller credits work on a different kind of new-construction loan, Lendmire has a separate article on seller-paid closing costs on a new-construction DSCR loan, which covers a separate lane with its own rules. Keep it separate from your VA plan.

Key Terms Defined

Funding fee: A one-time charge VA sets by law for most VA loans. It can be financed or paid by someone else.

Seller concession: Something of value a seller gives the buyer, such as paying the funding fee or prepaid items. VA caps these at 4% of reasonable value.

Notice of Value (NOV): The document VA issues after the appraisal. It states the home’s reasonable value, which sets the cap base.

Certificate of eligibility (COE): The VA document that confirms your eligibility and entitlement.

Entitlement: The amount of benefit you have to use. Subsequent use usually means a higher fee tier on low down payments.

Residual income: What is left of your income after major obligations and living costs. On VA loans it is the controlling underwriting test, and the 41% debt-to-income figure is a guideline, not a cap.

If you are buying a home and want to see whether a VA loan fits your file, Lendmire can help you compare the options and what each one asks of the file. You can request a scenario review to start.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. VA Home Loan Guaranty Buyer’s Guide

2. VA.gov: Funding Fee and Closing Costs

3. VA Lenders Handbook, Chapter 8

4. VA Circular 26-18-7