USA: how FHA loans and the VA funding fee work for buyers in 2026

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Kooky

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Saving a down payment is the first wall most first-time buyers in the United States run into. Two federal programmes exist to lower it. One is the mortgage insured by the Federal Housing Administration, open to the general public, with a down payment that the Department of Housing and Urban Development says can be as low as 3.5 per cent of the purchase price. The other is the home loan backed by the Department of Veterans Affairs, reserved for people with a service connection, which the VA says requires no down payment and no monthly mortgage insurance.

Neither is free. Each programme replaces the cash a buyer has not saved with a charge of its own: mortgage insurance on an FHA loan, a one-time funding fee on a VA loan. This guide explains both charges from the federal sources that set them: HUD's own pages and its Mortgagee Letter 2025-23 for the 2026 loan limits, the Consumer Financial Protection Bureau for what FHA insurance is, and the VA's funding fee page, last updated on 5 October 2026, for the fee rates. It covers federal rules only. State and local down-payment assistance programmes are a separate subject and are not described here, and the guide says plainly where a figure could not be verified.

HUD loans page and Mortgagee Letter 2025-23 (11 December 2025); VA funding fee page, rates effective 7 April 2023.

Two programmes, two different promises

The two routes are often named in the same breath, but they are built differently, and the difference explains everything that follows.

An FHA loan is not a loan from the government. The Consumer Financial Protection Bureau describes it this way: the Federal Housing Administration insures loans made by FHA-approved lenders against losses if a homeowner defaults. The lender is a private company. What the government adds is a promise to the lender. HUD notes that the FHA is part of the department and has helped people become homeowners since 1934.

A VA-backed loan works on a similar principle, with a lender making the loan and the federal government standing behind it, but the VA's page also covers VA direct loans, where the department itself lends. In both cases the charge the borrower meets is the funding fee.

The practical consequence for a buyer is the same in both programmes. Because a public body carries part of the risk, the lender can accept less money down than it otherwise would. And because that risk has a cost, the borrower pays for it. The CFPB says so directly for the FHA: the cost of the mortgage insurance is passed along to the homeowner. The VA gives its own reason for the funding fee: it helps lower the cost of the loan programme to taxpayers, since the loans carry no down payment requirement and no monthly mortgage insurance.

Who can use each route is the other dividing line. The FHA loan is a general programme. The VA's page speaks of a Veteran, a service member or a survivor as the person who pays the funding fee, and eligibility for the loan itself is governed by separate VA rules. This guide does not describe the service requirements, which sit outside the pages it draws on.

What an FHA loan offers a first-time buyer

HUD's loans page lists the features of the programme in a few lines. The down payment can be as low as 3.5 per cent of the purchase price. Closing costs are described as low. Credit qualifying is described as easy. And the loan is available on properties of one to four units.

The CFPB adds the comparison that matters to a buyer weighing options: FHA qualifying standards are generally more flexible than those for conventional loans. "Generally" is the important word. The agency does not publish a promise that any given applicant will be approved, and the lender, not the FHA, takes the application.

Three points are worth drawing out of that short list.

First, 3.5 per cent is a floor on the down payment, not a fixed price. HUD's wording is "as low as". A lender may ask for more depending on the file, and the pages read for this guide do not set out the credit score at which the 3.5 per cent figure applies. That threshold is deliberately left out here rather than quoted from memory.

Second, the programme is not limited to a single-family house. A property of two, three or four units also qualifies under HUD's description, and each size has its own loan limit, set out below.

Third, HUD points buyers to help that does not come from a lender. Its loans page gives a telephone line for HUD-approved housing counsellors, (800) 569-4287, and one for the FHA Resource Center, (800) 225-5342.

A worked example shows the scale of the down payment. Assume a purchase price of US$400,000 and the lowest down payment HUD describes. Three and a half per cent of US$400,000 is US$14,000, which leaves US$386,000 to be borrowed. The figures are illustrative: they show the arithmetic of the rule, not the price of a typical home, and they leave out mortgage insurance and closing costs.

FHA loan limits for 2026

The FHA does not insure a loan of any size. HUD publishes maximum mortgage amounts each calendar year, and the 2026 figures are in Mortgagee Letter 2025-23, dated 11 December 2025. The letter says they apply to loans whose FHA case number was assigned on or after 1 January 2026.

The limits depend on two things: where the property is, and how many units it has. HUD sets a national floor, which applies in low-cost areas, and a national ceiling, which applies in high-cost areas. Both are tied to the national conforming loan limit for a one-unit property, the figure announced each year by the Federal Housing Finance Agency and which HUD's letter refers to as the base Freddie Mac loan limit. For 2026 that limit is US$832,750. According to the Mortgagee Letter, the FHA floor is 65 per cent of it and the ceiling is 150 per cent of it. The arithmetic holds: 65 per cent of US$832,750 is US$541,287.50, published as US$541,287, and 150 per cent is US$1,249,125.

A third set of figures applies in four places only. Alaska, Hawaii, Guam and the US Virgin Islands are treated as special exception areas, with a higher ceiling that the letter attributes to higher construction costs.

Between the floor and the ceiling sit the areas whose limit is their own. The Mortgagee Letter explains that limits are set by metropolitan statistical area and by county, and that for a metropolitan area HUD uses the county with the highest median price within it. The department publishes the list of areas at the ceiling and of areas between the two, and offers a lookup tool and downloadable county listings. The gap is wide: on a one-unit property, the ceiling is US$707,838 above the floor. A buyer cannot know which figure applies without checking the county.

The letter also records that a request can be made to change a high-cost area limit, under the part of HUD Handbook 4000.1 headed "Requests for Local Increases". That handbook was not read for this guide, so the procedure is not described.

One more figure on HUD's lender page shares a number with the table and should not be confused with it. The 2026 maximum claim amount for a Home Equity Conversion Mortgage, the FHA's reverse mortgage, is US$1,249,125 for all areas. HUD says that product is for a borrower aged 62 or older who lives in the home. It is not a purchase loan for a first-time buyer.

The Alaska and Hawaii figure: two agencies, two numbers

One figure in this field does not match between the two federal bodies that publish loan limits, and the difference is stated here rather than smoothed over.

Some context helps to read the two numbers without choosing between them. The agencies are not setting the same limit. The FHFA release concerns conforming loan limits; HUD's letter concerns the mortgages the FHA insures. On the mainland the two documents agree where they meet: both give US$832,750 as the national one-unit figure and US$1,249,125 as the high-cost ceiling, and the FHFA release reports that the baseline rose by US$26,250 on a house price increase of 3.26 per cent.

In the four special areas the published numbers part by US$50. The Mortgagee Letter does not say how its special exception figures are computed, and neither document read for this guide explains the gap. One and a half times US$1,249,125 is US$1,873,687.50, which is neither agency's figure, so the arithmetic does not settle it either. For an FHA-insured loan, the figure in HUD's letter is the one HUD has published for its own programme; whether the difference is intended is an open point that only the two agencies can answer.

When the price is above the limit

A loan limit caps the mortgage, not the price of the home. A buyer may purchase a property that costs more than the limit for its county; what changes is the size of the down payment, because everything above the insured loan has to come from somewhere else.

A worked example, with assumed figures, makes the point. Take a one-unit home priced at US$600,000 in a county where the floor of US$541,287 applies. A down payment of 3.5 per cent would be US$21,000 and would leave US$579,000 to borrow, which is US$37,713 above the limit. To bring the loan down to US$541,287, the buyer would need to put in US$58,713, or about 9.8 per cent of the price. The 3.5 per cent minimum is still the rule; it simply stops being the figure that binds. The example leaves mortgage insurance aside, and the pages read for this guide do not say how an insurance premium added to the loan is treated against the limit.

The same home in a high-cost area would raise no such question, since US$579,000 is far below the ceiling of US$1,249,125. And the same price for a two-unit property in a floor area would also fit, because the two-unit floor is US$693,050. A buyer who plans to live in one unit and let the other is therefore working against a different number from the buyer of a single house in the same county.

Mortgage insurance: what is known and what is not

Mortgage insurance is the price of the low down payment, and it is the part of an FHA loan on which the federal pages opened for this guide say least.

What is established is the principle and one rule on how the insurance ends. The principle is the CFPB's: the FHA insures the lender, and the cost is passed to the homeowner. The rule is on HUD's mortgage insurance premiums page: for loans with a case number assigned on or after 3 June 2013, FHA insurance can be terminated if the mortgage is paid in full before it matures. For older loans, HUD refers to the cancellation rules in its Mortgagee Letter 2000-46.

Read carefully, that rule tells a buyer something practical. On a loan taken out today, HUD's page names payment in full before maturity as the event that ends the insurance. It does not, on that page, describe a point during the life of the loan at which the monthly premium simply drops away.

What is not established here is the price. HUD's premiums page, as read for this guide, carries no rates, and the department's page on its basic home mortgage insurance programme could not be opened. The upfront premium rate and the annual premium table are therefore not given. They exist and they bear on the monthly cost of an FHA loan; a guide that quoted them without having read them on HUD's own page would be guessing. The same applies to minimum credit scores, and to a change in FHA residency eligibility attributed to HUD's Mortgagee Letter 2025-09, which was not read and is not confirmed here.

HUD-owned homes and the US$100 down payment

One corner of the FHA programme goes lower than 3.5 per cent, and it is written into federal regulation. Part 291 of Title 24 of the Code of Federal Regulations governs the sale of homes that HUD itself owns. Section 291.100 provides that eligible properties may be bought as they stand with FHA insurance under section 203(b), the basic programme, or with a section 203(k) rehabilitation loan.

Within that part, section 291.510(a)(2) sets the down payment for one group of buyers: a purchaser under the Good Neighbor Next Door programme who uses an FHA-insured mortgage pays US$100. The conditions for taking part in that programme are set elsewhere in the same regulation and are not described in this guide. The point for a reader is narrower: the 3.5 per cent figure is the general rule of the FHA loan, not the only down payment federal rules provide for.

The VA funding fee and its purchase rates

The VA describes the funding fee as a one-time payment made on a VA-backed or VA direct home loan. It is charged once, at closing, and not again each year. The department lists the loans it applies to: loans to buy, build, improve, repair or refinance a home.

Two features of the fee are easy to get wrong.

The first is the base. The VA says the fee is a percentage of the loan amount, not of the purchase price. A buyer who puts money down pays the fee on a smaller sum.

The second is that the rate is not single. According to the VA, the type of loan is the main factor, and for some loans two more things count: whether the borrower has used a VA loan before, and how large the down payment is. The rate charts on the department's page are stated to be effective from 7 April 2023. The page does not say whether the rates will change after 2026.

The VA illustrates the base with its own example. A first-time user buys a US$200,000 home with a US$10,000 down payment, which is 5 per cent. The loan is US$190,000, the rate is 1.5 per cent, and the fee is US$2,850.

For a VA-backed loan to buy or build a home, the rate falls as the down payment rises, and the penalty for a second use disappears once the borrower puts down 5 per cent.

The table rewards a reading across as well as down. A borrower with no down payment pays 2.15 per cent the first time and 3.3 per cent on any later loan, a difference of 1.15 percentage points. At 5 per cent down, both pay 1.5 per cent. At 10 per cent down, both pay 1.25 per cent. Prior use matters only to the borrower who puts down less than 5 per cent.

The VA adds one clarification on what counts as a first use. A borrower whose only earlier VA loan was for a manufactured home still pays the first-use rate.

A worked example puts the rates into dollars. Assume a purchase price of US$400,000, with the down payment measured against the price as in the VA's own example, and the fee computed on the amount borrowed.

With nothing down, the loan is the full price: the fee is 2.15 per cent of US$400,000 on a first use and 3.3 per cent of the same sum on a later one. With US$20,000 down, the loan is US$380,000 and the rate 1.5 per cent. With US$40,000 down, the loan is US$360,000 and the rate 1.25 per cent. For a repeat borrower, the step from no down payment to 5 per cent cuts the fee by US$7,500; for a first-time user, the same step saves US$2,900. In neither case does the saving on the fee equal the US$20,000 put down, so the fee alone is rarely the reason to find a down payment. It is one cost among several.

Who does not pay the fee, and when it is refunded

A large group of borrowers pays no funding fee at all. The VA lists five situations:

• a person receiving VA compensation for a service-connected disability;
• a person eligible for that compensation but receiving retirement pay or active-duty pay instead;
• a surviving spouse receiving Dependency and Indemnity Compensation;
• a service member who, before closing, has received a proposed or memorandum rating finding them eligible for compensation on a pre-discharge claim;
• an active-duty service member who provides evidence of a Purple Heart on or before the closing date.

Timing runs through the last two. The rating has to arrive before closing; the Purple Heart evidence has to be given on or before the closing date. The date of closing is the line.

For a buyer with a disability claim still pending, the two rules work together. If the decision comes before closing, there is no fee to pay. If it comes afterwards but is backdated to before closing, the fee paid may be returned. If it takes effect after closing, the fee stands. Which of the three applies depends on the claim, not on the loan.

Paying the fee, seller concessions and other closing costs

The fee falls due at closing, and the VA gives two ways to settle it: pay the full amount then, or add it to the loan and repay it over time. In the worked example above, a first-time user with no down payment who finances the US$8,600 fee borrows US$408,600 in place of US$400,000, and pays interest on the difference for as long as the loan runs.

Financing has a limit that buyers sometimes miss. On a purchase loan, the VA says, only the funding fee can be financed. Every other closing cost has to be paid at closing. The department's list of those costs includes the loan origination fee, discount points, the credit report, the VA appraisal fee, hazard insurance and real estate taxes, state and local taxes, title insurance and the recording fee. It also names the real estate professional's commission and fees, and it places closing costs among the things buyers and sellers can negotiate. The lender sets the interest rate, the points and its own charges, which vary from one lender to the next; the Loan Estimate shows the expected total.

A seller may help in two distinct ways under the VA's rules. Credits towards the buyer's closing costs are one. Seller's concessions are another, and those are capped at 4 per cent of the home's reasonable value, the figure shown on the VA Notice of Value. The VA defines a concession by example: paying the buyer's funding fee, paying off the buyer's debts, or prepaying hazard insurance. On a home with a reasonable value of US$400,000, to stay with the example, the cap is US$16,000, enough to cover a first-use fee of US$8,600 with room left over. The base is the value on the notice, not the contract price.

One tax point belongs here. IRS Publication 936, in its edition for 2025 returns, states that VA funding fees are not points. A buyer who finances or pays the fee should not expect it to be treated as points for the mortgage interest deduction.

Refinances, assumptions and other VA loans

The purchase table is not the whole schedule. The VA publishes separate rates for other loans, and several do not vary with the down payment or with prior use.

A cash-out refinance carries the same two rates as a purchase with little money down: 2.15 per cent on a first use and 3.3 per cent after it. An interest rate reduction refinancing loan, known as an IRRRL, is charged 0.5 per cent. The assumption of an existing VA loan is also charged 0.5 per cent. A loan on a manufactured home that is not permanently affixed carries 1 per cent, and a vendee loan, used to buy a property the VA has acquired, 2.25 per cent. The Native American Direct Loan is charged 1.25 per cent on a purchase and 0.5 per cent on a refinance.

For a first-time buyer the assumption rate is the one most likely to matter later. The buyer who takes over a seller's VA loan pays 0.5 per cent of the loan amount under the VA's schedule, against 2.15 per cent on a new first-use loan with less than 5 per cent down. On a loan balance of US$300,000, taken as an example, that is US$1,500 against US$6,450. Whether an assumption is available on a given home, and on what terms, depends on the loan and the lender, and the VA's fee page does not set those conditions out.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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