Understanding the Funding Fee
Posted by: Greg Fischer Post date: February 23rd, 2011“Why is my loan so high?” asked a borrower the other day. “I thought VA loans had almost no closing costs?”
She was right: VA loans have no mortgage broker fees (unless charged as points, something I don’t do), the Veteran can’t pay the lender fees, no courier, processing, admin or other “junk” fee either.
But 100% financing with no monthly PMI still comes at a cost. Most government loans – which means government insured loans, since regular banks are lending the money – have some form of funding fee. This is the up front cost that is usually financed into the new loan that funds the insurance pool for these organizations.
They come by different names: FHA has an UFMIP (Up Front Mortgage Insurance Premium), VA has a funding fee, Rural Development a Guarantee Fee, but they all amount to the same thing. One time mortgage insurance premium paid at closing, usually financed into the loan, allowing the agency to insure the lender against default.
But this is a good thing. Compared to conventional PMI, funding fees tend to be less expensive. They are also much less expensive per month than monthly PMI. And in all three cases, the government guarantee permits a higher percentage of financing than conventional PMI will allow (100% in the case of VA and RD, something that no longer exists in the PMI world).
So yes. You didn’t borrow 100% of the purchase price on your VA home loan – you borrowed 102.15% including the funding fee. RD loans are 103.5% of the purchase price. FHA has a 1% UFMIP and monthly MI, which is still less than PMI at >95% financing. Without it, you would have needed a larger downpayment and a monthly PMI payment.
Now if you DO have money to put down, perhaps government loans aren’t the best solution. But that’s a topic for another post.
- Tags: Rural Development/USDA