VA Loan Mortgage Insurance Rules and What the Funding Fee Does

The Quick Read: A VA loan carries no mortgage insurance of any kind, monthly or otherwise. The VA guaranty to the lender does the job that private mortgage insurance does on other loans. In place of insurance, most borrowers pay a one-time funding fee that can be financed, and veterans in exempt groups pay nothing. Everything here is subject to lender guidelines and full file review.

Why Is There No Mortgage Insurance on a VA Loan?

Because the government guarantees part of the loan, the lender is protected if the borrower defaults. Private mortgage insurance exists to cover that same risk on loans with small down payments. VA replaces it with a guaranty, so there is nothing to buy and nothing to cancel later.

VA News explains that the funding fee offsets the program’s cost to taxpayers. That is what allows features like no down payment and no monthly private mortgage insurance.

Across the wholesale programs Lendmire places VA purchase files with, the structure is consistent. Financing goes up to 100% of the price, as long as the price is not above the appraised value. There is no mortgage insurance of any kind. With full entitlement there is no VA loan limit. If a borrower has only remaining entitlement, a down payment may be required, and that is a conversation for a loan officer, not a number to guess at.

Short version: no PMI, no FHA-style premium, no monthly insurance line in the budget.

What Does the Funding Fee Actually Do?

The funding fee is a single charge, paid to VA, that keeps the guaranty program funded. Under 38 CFR 36.4313, the fee is paid to the Secretary of Veterans Affairs. The lender collects it at closing and passes it along.

It is not a lender fee. It is not monthly. It is not insurance on the borrower’s behalf. The fee supports a program that lets lenders offer low or no down payment loans.

Congress sets the fee by statute. Neither the lender nor the broker can negotiate it. Rates change only when the law or VA’s schedule changes.

What Determines the Fee Amount?

Three things: the loan purpose, whether it is first or subsequent use of the benefit, and the down payment. Not the appraisal. Not the credit score.

For a purchase, the tiers in the programs Lendmire works with look like this:

Notice what happens at 5% down. The first-use and subsequent-use rates become the same. The higher subsequent-use rate only applies when the down payment is under 5%. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Other loan types carry their own fees. The IRRRL, VA’s streamlined refinance, is 0.5%. A VA cash-out refinance is 2.15% on first use and 3.3% after. VA publishes the authoritative schedule on its funding fee and closing costs page, and that page controls if anything changes.

How Does Paying the Fee Work, in Cash or Financed?

The fee can be paid at closing in cash or added to the loan balance. VA’s buyer’s guide says the same thing: pay it in cash or include it in the loan.

Financing it has a trade-off. A larger balance means a larger payment and more interest paid over the life of the loan. Paying cash keeps the balance lower. Which makes sense depends on how much cash the borrower wants to keep after closing.

Here is the mechanical part people miss. On a purchase, the federal regulation says closing costs and prepaid items may not be included in the loan. The funding fee is the one exception. Appraisal, title, recording, and prepaids still come due at closing, whether the borrower pays them, a seller covers them, or credits apply.

So “VA loans have no closing costs” is wrong. The program limits what a lender may charge. The rule allows only the charges it expressly permits, and the lender certifies that it imposed no others. But costs remain.

Consider a borrower buying with no down payment and financing the fee. The loan balance ends up at 100% of the price plus the fee percentage. That is why the fee matters for entitlement and for the loan amount, and why a loan officer should walk through the numbers on your actual file.

Who Is Exempt From the Funding Fee?

Exempt borrowers pay $0. The main groups are:

The Certificate of Eligibility (COE) decides. Request it early and read the funding fee line. VA Circular 26-23-19 says exemption status should be established before closing. Confirm the group list on VA’s own page before relying on it.

Where the Exemption Goes Wrong

A few cases cause most of the trouble.

Pending claims. A disability claim in process is not enough. Exemption depends on receiving compensation, or on holding a proposed or memorandum rating.

Pre-discharge timing. For an active-duty member whose COE shows Non-Exempt, the lender should submit VA Form 26-8937, Verification of VA Benefits. Per that circular, if no proposed or memorandum rating exists and closing occurs before discharge, the exemption does not apply and VA will not refund the fee.

Late awards. A veteran awarded compensation after closing may qualify for a refund if the effective date falls before closing. Ask VA directly.

Charged in error. If the closing figures show a fee and the COE shows exempt, stop and get the file corrected before signing. Do not close and sort it out later.

What Does Underwriting Look For Instead of Insurance?

With no insurer in the picture, the lender’s review leans on the borrower’s finances. Residual income is the controlling test. That means what is left of monthly income after debts, taxes, and living costs, measured against a table by family size and region.

The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table. VA sets no minimum credit score, but the wholesale programs Lendmire places VA loans with start at a 580 decision score. Lenders may set a higher floor. These wholesale programs serve amounts up to $4,000,000 with full entitlement.

The funding fee does not change whether you qualify by itself. But a financed fee raises the loan amount, which can matter for entitlement. Ask how that plays out on your file. The appraisal is a separate step. It sets value and checks Minimum Property Requirements, and the fee does not depend on its result.

Which Insurance Still Applies?

“No mortgage insurance” does not mean “no insurance.” Searchers mix these up constantly.

Homeowners and flood insurance protect the property. They are separate from the guaranty and from the fee. Budget for them. They vary by home and location, and the lender will want proof of coverage before closing.

How Does the Fee Work on a Refinance?

The fee applies to refinances too, and each type differs. An IRRRL refinances an existing VA loan to a lower rate or from adjustable to fixed. It needs no VA appraisal, carries a 0.5% fee unless exempt, and requires a net tangible benefit. Seasoning is the later of 210 days from the first payment and the 6th payment.

A VA cash-out refinance can reach 100% of the appraised value, including the financed fee. It can refinance any loan type into VA, with the same seasoning and net tangible benefit tests. Moving out of a conventional loan this way ends any private mortgage insurance on it. Lendmire’s piece VA Cash-Out Funding Fee vs Conventional Cash-Out Mortgage Insurance goes deeper on that comparison.

Key Terms Defined

Guaranty: VA’s promise to repay a portion of the loan to the lender if the borrower defaults, which replaces mortgage insurance.

Funding fee: A one-time percentage-of-loan charge paid to VA, set by statute and waived for exempt borrowers.

Certificate of Eligibility (COE): The VA document that confirms service eligibility and shows funding fee exemption status.

Entitlement: The amount of the guaranty available to a veteran, used up in part when a loan is active.

Residual income: Monthly income left after debts, taxes, and living costs, used by VA as the controlling underwriting test.

IRRRL: VA’s interest rate reduction refinance loan, a streamlined refinance of an existing VA loan.

Common Mistakes

1. Treating the fee as monthly insurance. It is one charge, not a recurring line.

2. Assuming a disability claim means exempt. Only documented compensation or a qualifying rating counts, and it must be in place before closing.

3. Rolling in all closing costs. On a purchase, only the funding fee can be financed.

4. Skipping the COE check. Read the exemption line early, not at the closing table.

5. Ignoring the down payment tiers. Moving from under 5% to 5% down lowers the fee, and for a subsequent-use borrower the drop is large. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.

Which Situation Are You In?

• Buying, first use, exempt: Confirm the COE to see whether the funding fee exemption applies.
• Buying, first use, not exempt: Fee set by down payment tier.
• Buying, subsequent use, under 5% down: The highest purchase tier applies.
• Refinancing an existing VA loan: Look at the IRRRL.
• Pulling equity or leaving a conventional loan: Look at the VA cash-out. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.

Buyers who want the full picture of the program can start with Lendmire’s VA loan programs page. Veterans who already hold a VA loan can see how the fee works for them in Lendmire’s article on VA cash-out fee rules with an existing VA loan.

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. Nothing here is a commitment to lend, and all figures are subject to lender guidelines and full file review.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. VA News: Funding fee, who pays and who is exempt

2. eCFR 38 CFR 36.4313

3. VA funding fee and closing costs page

4. VA Home Loan Guaranty Buyer’s Guide

5. VA Circular 26-23-19