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VA funding fee exemption: How it works and who qualifies

Yahoo Personal Finance· Getty Images
5 min read

For veterans or active-duty service members buying a home, VA home loans offer the opportunity to become a homeowner with little to no down payment. However, you may have to pay an extra charge called a VA funding fee either as part of your closing costs or by rolling it into the loan amount. The fee adds at least $1,250 per $100,000 of your mortgage, depending on the size of your down payment.

Qualifying service members and veterans with disabilities or surviving spouses can skip this fee and save thousands on their home purchase price. Here’s what you need to know about both qualifying for the VA funding fee exemption and following the rules to ensure your fee is waived.

Read more: How a VA streamline refinance (VA IRRRL) works

In this article:

What is the VA funding fee exemption?

How to get a VA funding fee exemption

How much is the VA funding fee without the exemption?

How to qualify for a VA funding fee refund

FAQs

The U.S. Department of Veterans Affairs funding fee is an extra fee (usually part of your closing costs) borrowers pay when purchasing, repairing, building, or refinancing a home with a VA-backed or VA direct home loan. If you default on mortgage payments, the fee protects the lender or the VA.

The VA funding fee exemption is a waiver from paying this charge, and it’s available to qualifying veterans, service members, and surviving spouses. The rules apply regardless of the branch of service.

You are exempt from having to pay a VA funding fee if you are one of the following:

  • A veteran receiving VA compensation for a service-connected disability.

  • A veteran who is eligible for VA compensation for a service-connected disability but has instead opted to receive retirement or active-duty pay.

  • A surviving spouse receiving Dependency and Indemnity Compensation (DIC).

  • An active-duty service member who provides evidence of receiving the Purple Heart before the mortgage closing date.

  • A service member with a proposed or memorandum rating before the closing date showing eligibility for service-connected disability compensation due to a pre-discharge claim.

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For most eligible borrowers, your VA funding fee exemption status will be automatically reflected on your VA Certificate of Eligibility (COE) for home loans, according to VA press secretary Terrence Hayes. The certificate process may vary, but most can request the certificate online. Veterans should contact the VA about any eligibility questions or snags in the process at 877-827-3702 Monday through Friday, 8 a.m. to 6 p.m. ET.

According to Hayes, Purple Heart active-duty members must provide evidence of their Purple Heart with the COE request or to their VA mortgage lender.

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VA funding fee rates vary depending on your down payment and whether or not this is your first VA home loan. If you have less than 5% down, the fee is 2.15% of the loan value on your first VA mortgage and 3.3% if this isn’t your first VA mortgage. Whether or not this is your first VA loan, the funding fee amount is 1.5% with a 5% down payment and 1.25% of the loan value with a down payment of 10% or more.

Read more: Best mortgage lenders for first-time home buyers

VA funding fee refunds are sometimes possible if you are approved for VA compensation for a military service-connected disability after your loan closing date. The key is your service-connected disability must apply retroactively to a date before your closing day.

For instance, let’s say you closed on a home loan on May 1, and VA compensation for your service-connected disability is approved retroactively to April 30. In this case, you may be eligible for a refund.

Suppose you’re a military service member closing on your house who filed a pre-discharge claim for VA service-connected disability compensation before leaving service. In that case, you should ask your VA lender to submit VA Form 26-8937, Verification of VA Benefits, to request the proposed or memorandum rating. Without this proposed or memorandum rating, you will not get a VA funding fee refund.

Learn more: How a VA cash-out refinance works

The VA funding fee is waived for eligible veterans, active-duty service members, and surviving spouses. Most eligible borrowers have service-related disabilities or are surviving spouses of a veteran.

You may qualify to waive the VA loan funding fee if you or your spouse has faced a service-related disability. If you don’t qualify for the VA funding fee waiver, you can get a reduced cost by making a down payment of 5% or more when you buy the house.

The VA funding fee is based on whether or not you receive compensation for your disability rather than on a percentage.

The funding fee exemption doesn’t require choosing a specific lender.

No, the VA funding fee exemption doesn’t depend on your branch of service in any way.

According to the IRS, the VA funding fee isn’t an eligible tax deduction.

This article was edited by Laura Grace Tarpley