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When you hear all of the amazing benefits of a VA loan, it’s natural to get a bit excited. You get a lower interest rate and more lenient credit standards than with a conventional loan, there’s no mortgage insurance required, and you don’t even have to make a down payment. You’re bound to think, “What’s the catch?”

The catch is the VA funding fee. It can come as quite the surprise to qualified VA home loan borrowers. You may not even know there is such a thing until the lender tells you. And it’s not a small-change charge. The Department of Veterans Affairs uses the fee to help defray the costs of VA-guaranteed loans that default.

Here’s what you need to know about the VA funding fee.

How much is the VA mortgage funding fee?

If you’re eligible for a VA-backed home loan, you are gaining a valuable benefit in return for your service to America. But, with few exceptions, a one-time funding fee must be paid directly to the Department of Veterans Affairs for each home loan, whether it’s for a VA purchase or VA refinance.

» MORE: How much home can you afford?

The amount of the funding fee is based on your service, how much you’re putting down and if you’ve ever had a VA-backed loan before. (If you have, a new loan is called “subsequent use.”)

Here’s how the fees break down as a percentage of the loan amount:

When you don’t have to pay a VA funding fee

There are generally two situations when you won’t have to pay a VA funding fee:

  • If you are entitled to or receiving compensation for a service-connected disability
  • Or, if you are “a surviving spouse of a veteran who died in service or from a service-connected disability,” the Department of Veterans Affairs says

You don’t have to pay the funding fee out of pocket

For some borrowers, the VA funding fee can be an unexpected expense or one that they are not prepared to pay. There is an option to consider: You can roll the funding fee into your total loan amount. While that gets you off the hook for paying out a sizable lump sum upfront, it also means that your monthly payment — and your total loan costs — will be higher. Here’s what that looks like:

On a 30-year, $300,000 purchase mortgage at 4%, regular military, with 0% down — and just considering principal and interest, not taxes, insurance or anything else — your monthly payment would be around $1,430. The VA funding fee for a first-time VA borrower would be $6,450 (2.15%). But that’s if you paid the funding fee out of pocket.

By rolling that $6,450 into your loan amount, it adds over $11,000 in total costs over the life of the loan — and your monthly payment would increase by $30 to around $1,460 a month.

» MORE: Use our VA loan calculator to determine your monthly payment

And it’s not the only fee you’ll see

The VA funding fee won’t be the only charge you’ll face at closing. Mortgage loans come with closing costs and can include discount points, lender fees, an appraisal, credit report, property taxes and more.

You can negotiate some of these fees, and the seller of the home might be persuaded to pay for some of them. And again, you can roll some or all of the costs into your loan amount.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @halmbundrick.

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