The VA Funding Fee, Explained: First-Use vs. Subsequent-Use Rates, Exemptions, and the 2026 Deduction

Your second VA home loan costs you half again as much in funding fees as your first — on the same loan amount, with the same lender, for the same house. A $400,000 purchase with no down payment carries an $8,600 funding fee the first time you use the VA benefit and a $13,200 fee the second time. Most borrowers never see either number as cash out of pocket, because the fee is quietly rolled into the loan balance at closing. That convenience is exactly why the funding fee deserves a closer look: it is the largest closing cost on most VA loans, it compounds with interest for decades when financed, and starting with the 2026 tax year it is deductible again for borrowers who itemize.

This guide walks through how the fee works, what first-time and repeat borrowers each pay, who pays nothing at all, what it really costs to roll the fee into your loan, and how to claim the restored tax deduction.

What the VA Funding Fee Is and Why It Exists​

The VA funding fee is a one-time charge the Department of Veterans Affairs collects on nearly every VA-backed and VA direct home loan — purchase loans, construction loans, and both refinance types. It exists for a simple reason: the VA home loan program requires no down payment and charges no monthly mortgage insurance, which makes each loan riskier and more expensive for the taxpayer to guarantee. The upfront fee offsets part of that cost and keeps the program running without annual appropriations fights.

Two features make it different from the mortgage insurance on other loan types:

• It is one-time, not monthly. Conventional private mortgage insurance and FHA annual premiums bill you every month until you cancel or refinance them away. The VA fee is assessed once, at closing, and never recurs.
• It is a percentage of the loan amount, not the purchase price. Your down payment shrinks the base the fee is calculated on. On a $300,000 home with 5 percent down ($15,000), the fee applies to the $285,000 loan — not the full $300,000.

The current rate schedule took effect April 7, 2023, and remains in force. Congress periodically adjusts the rates, so always confirm the table below against the VA's published charts before you close — but the structure (first use cheaper than later uses, bigger down payments earning lower rates) has been stable for years.

First-Use vs. Subsequent-Use Rates​

Whether you are using the VA benefit for the first time is the single biggest driver of what you pay. The VA charges repeat users more because the program's subsidy is front-loaded toward getting veterans into a first home.

Purchase and construction loans​

Three things stand out in this table:

1. The zero-down repeat buyer pays the steepest rate. At 3.30 percent, a $350,000 loan costs $11,550 in funding fees — the price of reusing the benefit with nothing down.
2. A 5 percent down payment erases the repeat-user penalty entirely. At 5 percent down or more, first-time and subsequent users pay identical rates. If you are reusing your entitlement and can scrape together 5 percent, the rate drop from 3.30 to 1.50 percent is the best return on a down payment in the mortgage market.
3. These rates apply uniformly to veterans, active-duty service members, and National Guard and Reserve members alike.

Cash-out refinances​

Cash-out refinances use a flat schedule with no down-payment tiers: 2.15 percent for first use, 3.30 percent for subsequent use. Note the trap here for serial refinancers: moving a conventional or FHA loan into the VA program counts as a VA cash-out refinance, so a borrower who already used the benefit once pays the 3.30 percent rate on that move even though it feels like a first VA refinance.

The flat-fee loan types​

Several loan types carry a single rate regardless of use count or down payment:

• Interest Rate Reduction Refinance Loan (IRRRL, the "streamline"): 0.50 percent — the cheapest fee in the program, reflecting that the VA is already on the hook for the loan being refinanced.
• Manufactured home loans (not permanently affixed): 1.00 percent.
• Loan assumptions: 0.50 percent.
• Native American Direct Loans: 1.25 percent for purchase, 0.50 percent for refinance.
• Vendee loans on VA-acquired property: 2.25 percent.

One counting quirk works in borrowers' favor: if your only prior VA loan financed a manufactured home alone, the VA still treats your next loan as a first use.

What counts as "subsequent use"?​

Any prior VA-backed or VA direct loan generally flips you into the subsequent-use tier — even if that loan is paid off, even if the property was sold years ago, and even if your entitlement was restored. Restored entitlement resets how much you can borrow, not which fee column you land in. The exception above for manufactured-home-only history is the only reset in the rules.

Who Is Exempt From the Funding Fee​

Roughly a third of VA borrowers pay no funding fee at all. You owe nothing if any one of these is true:

• You receive VA compensation for a service-connected disability. Any compensable rating qualifies — there is no minimum percentage. This is by far the most common exemption.
• You would receive that compensation but take retirement or active-duty pay instead. The entitlement, not the paycheck, controls.
• You receive Dependency and Indemnity Compensation (DIC) as a surviving spouse. Surviving spouses using the home loan benefit are exempt.
• You have a proposed or memorandum rating from a pre-discharge claim before closing. Service members going through the Benefits Delivery at Discharge or similar programs can lock in the exemption with a rating issued before the loan closing date.
• You are active-duty and received a Purple Heart. Provide evidence of the award on or before closing.

The exemption must appear on your Certificate of Eligibility​

This is the most expensive paperwork detail in the program. The exemption has to show on your Certificate of Eligibility (COE) — the document that proves your entitlement — before closing, or the lender charges the fee. If your disability claim is pending at closing and the rating arrives later, you can recover the money, but recovery is a refund process with its own rules, not an automatic credit.

Funding fee refunds​

If you paid the fee and are later awarded VA disability compensation with an effective date retroactive to before your loan closing, you can get the fee refunded — contact your VA regional loan center to start the process. But there is a sharp edge: a proposed or memorandum rating issued after closing does not qualify for a refund. The pre-discharge rating path to exemption only works when the rating predates the closing date.

Rolling the Fee Into Your Loan: What It Really Costs​

At closing you have two choices: pay the fee in cash or finance it — add it to the loan balance and pay it off with interest over the life of the loan. On a purchase or construction loan, the funding fee is the only closing cost the VA lets you finance; every other fee must be paid at the table.

Most borrowers finance it, and the VA expressly allows the financed fee to push the loan amount above other limits that would otherwise cap it. But "most borrowers do it" is not the same as "it is free." Run the math before you default to financing:

• A $8,600 fee financed at 6.5 percent over 30 years costs about $19,500 in total — the original $8,600 plus roughly $10,900 in interest. Paying cash at closing avoids every dollar of that interest.
• The financed fee also earns no equity. It increases your loan-to-value ratio from day one, which matters if you sell or refinance within the first few years: on a zero-down loan, the financed fee alone can leave you owing more than the home appraises for.
• Paying cash only wins if you have the cash without raiding your reserves. Draining an emergency fund to save future interest is a bad trade — the whole point of the zero-down VA benefit is preserving liquidity. A reasonable middle ground: finance the fee, then direct what would have been a larger down payment toward an early principal payment or a rate buydown.

Seller concessions can cover it​

Home sellers can credit you for closing costs without limit on the VA's side for standard closing items, but seller concessions — anything of value added to the deal at no cost to you, including credits toward the funding fee, debt payoffs, or prepaid hazard insurance — are capped at 4 percent of the home's reasonable value (the figure on the VA Notice of Value). In a buyer's market, negotiating a seller credit against the funding fee is often cheaper than financing it, because the credit costs you nothing in interest.

The 2026 Deduction: What Borrowers Can Now Claim​

Here is the headline change. The One Big Beautiful Bill Act (Public Law 119-21), signed July 4, 2025, permanently restored the federal deduction for mortgage insurance premiums starting with tax year 2026 — and the VA funding fee explicitly counts as a qualifying premium, alongside private mortgage insurance, FHA premiums, and USDA guarantee fees. The deduction had lapsed after the 2021 tax year; borrowers who closed between 2022 and 2025 got no federal benefit for the fee. Those closing now do, provided they clear four hurdles:

1. You must itemize. The premiums are treated as deductible home mortgage interest reported on Schedule A. If the standard deduction still beats your itemized total — as it does for most filers — the funding fee deduction saves you nothing. Run both calculations before assuming you benefit.
2. Your income must fit under the phaseout. The deduction shrinks once adjusted gross income passes $100,000 ($50,000 if married filing separately) and disappears entirely at $110,000 ($55,000 separate). The phaseout is steep: each $1,000 of AGI over the threshold ($500 for separate filers) wipes out 10 percent of the deduction.
3. The loan must be acquisition debt on a qualified residence. The standard mortgage-interest rules apply — the fee is deductible only to the extent the underlying loan qualifies.
4. Watch your Form 1098. Lenders are again required to report qualifying mortgage insurance premiums on Form 1098, so check that box when the form arrives rather than reconstructing the number from your closing disclosure.

One favorable technical detail: the upfront VA funding fee is generally deductible in the year you pay it — the year you close — rather than spread over the life of the loan. That differs from most other prepaid mortgage insurance premiums, which the tax code forces borrowers to amortize month by month over up to 84 months. A first-time buyer who pays an $8,600 fee at a 2026 closing and itemizes that year can deduct the full $8,600 on the 2026 return, subject to the income limits above.

Because the restoration is new law, expect tax software and preparers to handle it with varying degrees of grace the first season. If your return omits the deduction, the fix is an amended return — not a lost benefit — but catching it before you file is simpler. And as with any tax position tied to fresh legislation, confirm the details with a qualified tax professional rather than treating this article as advice.

Mistakes That Cost VA Borrowers Real Money​

• Assuming the exemption applies itself. If your disability rating is pending, tell your lender, track your COE, and understand the refund rules before closing — not after.
• Forgetting the subsequent-use bump when budgeting a second purchase. PCS moves and growing families reuse the benefit constantly. Price the 3.30 percent rate (or a 5 percent down payment that defeats it) into your offer math from the start.
• Refinancing an FHA loan into VA without pricing the cash-out fee. It feels like a rate-and-term refinance, but the VA prices it as a cash-out at 2.15 or 3.30 percent — compare that against a conventional refinance with cancellable PMI before committing.
• Financing the fee reflexively. On a loan you expect to refinance or sell within a few years, paying the fee in cash (or negotiating a seller credit) often beats adding it to a balance you will soon pay off anyway.
• Assuming the deduction is automatic. It requires itemizing, fits under an income cap, and only applies to 2026 and later tax years. A borrower who takes the standard deduction gets zero benefit no matter how large the fee.
• Losing the paperwork. Your closing disclosure proves what you paid, your COE proves your exemption status, and Form 1098 reports the deductible amount. Keep all three with your tax records for at least three years after you file the return claiming the deduction.

Track the Fee Like the Asset It Affects​

The funding fee touches three parts of your financial life at once: it increases your mortgage balance, it may reduce your tax bill, and — when financed — it quietly raises your true cost of borrowing. That makes it worth recording deliberately rather than letting it vanish into the loan balance. Log the fee amount and whether you paid cash or financed it alongside your closing disclosure, note the tax year you plan to deduct it, and keep the COE showing your exemption status (or the refund paperwork, if your rating came through after closing) with the same file.

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