VA Clarifies Funding Fee Determination for Certain Purchase and Construction Loans

In Circular 26-21-26 (Circular), published as a supplement to information provided in the VA’s prior Circular 26-21-11 (which discussed determinations of whether a borrower is exempt from paying the statutory funding fee), the VA clarifies the funding fee calculation for borrowers purchasing or constructing a home with a 5 percent down payment.  The Circular became effective on December 17, 2021.  It applies only to purchase and construction loans where the borrower is not exempt from paying the statutory funding fee.

As noted in the Circular, for VA loans made to purchase or construct a dwelling where the borrower makes at least a 5 percent down payment, such loans are subject to a reduced funding fee and, for calculation purposes, the percentage down is calculated as a percentage of the total purchase price or construction cost of the dwelling.  This includes cases where the purchase price exceeds the reasonable value, as established by the VA.  Additionally, any amount paid by the borrower toward the purchase price, including any amount exceeding reasonable value, must be included in the percentage down calculation.  Note that for construction loans, any equity in the secured property may be used as a down payment for purposes of calculating the funding fee.

In connection with the Circular, the VA issued an exhibit that contains the loan fee rates applied to loans closing on or after January 1, 2020, through April 7, 2023.  The Circular also includes examples of the funding fee calculation in the described scenarios.