Tuesday, June 19, 2012

Is a VA Funding Fee Tax Deductible

By Sue-Lynn Carty

The U.S. Department of Veteran's Affairs (VA) offers low down payment, low interest mortgage loans to qualified military service men and women. Conventional loans through private lenders and Federal Housing Administration (FHA) loans require some time of mortgage insurance. VA loans do not have such requirements. Instead, VA borrowers must pay a VA funding fee.

The VA funding fee is a percentage of the total mortgage loan that the borrower must pay at closing. The borrower may decide to pay this fee out of pocket or add it into his mortgage loan. VA funding fees vary depending upon down payment amount and whether the loan is the borrower's first VA loan. VA funding fees are also different for those enlisted in the regular military and those in the military reserves or National Guard. The VA funding fee is subject to change, but currently ranges between 1.25 percent and 3.3 percent of the total loan amount.

The VA insures all VA mortgage loans. So, if a borrower defaults on her mortgage, the VA pays the lender a percentage of the loan amount. This insurance or guaranty is one of the main reasons why the VA can offer no or low down payment mortgage loans to qualified VA borrowers. The purpose of the funding fee is to help finance the VA loan program and to help pay lenders for borrower defaults.

The VA allows for certain exemptions to paying the funding fee. These exemptions include military service men and women who are being paid VA compensation for injuries received in the line of duty and surviving spouses of military service men and women who died in the line of duty. Military veterans who retired due to an injury received in the line of duty and are currently receiving retirement pay may also be eligible to have their VA funding fee waived.

Tax laws are always subject to change, but for the 2010 tax year, the VA funding fee is tax deductible. However, the borrower must have closed on his loan in 2010 to take the deduction. The IRS treats the VA funding fee the same way it treats mortgage insurance premiums for conventional loans. If the total amount the borrower paid for his funding fee is over $600, the VA reports this amount on Form 1098 Mortgage Interest Statement and sends a copy to the borrower. If the borrower does not receive a Form 1098, he should contact the VA.


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