The VA funding fee is one drawback of an otherwise fantastic home loan program.
The loan itself offers zero down, no monthly mortgage insurance, and lenient credit guidelines. But the funding fee can be downright expensive.
On a $300,000 loan, the funding fee for first-time use is $6,900 (2.3%). A second or additional use, it’s 3.6% – an eye-popping $10,800.
But what if you are eligible for a VA funding fee exemption, you just didn’t realize it yet?
That’s the situation for many veterans and those on active duty.
Even 10% disability exempts you from paying the funding fee. This is the same minimum disability percentage required to receive disability payment from the VA.
And many veterans are eligible for VA funding fee exemption but just haven’t applied yet!
Read this if you don’t feel like the government owes you anything and/or don’t feel disabled
Veterans are honorable people and often, they don’t feel like Uncle Sam owes them anything, so never apply for disability.
That’s commendable. But at the same time, you should think twice about adding an extra $10,000 to your VA loan if you don’t have to.
The VA funding fee is added to your loan amount (unless you pay in cash). This is extra debt that you’re taking on when you could rightfully avoid it. Plus, a $10,000 funding fee adds about $60 per month to your payment at a 6.5% rate.
Apply for disability before or during your VA loan application
I was speaking to a friend of mine, Tom Pessemier, about this issue. I mention him because he has personally been able to get over $70,000 in VA funding fees refunded to veterans with the following process.
So, this isn’t theoretical. It works even if you’re already in the process of your VA home loan, and in some cases, after you’ve closed the loan.
If you’re eligible for at least 10% disability, and that disability was retroactive to before your loan closing, your funding fee can be returned even after you pay it during the VA loan process.
Here’s how it works.
- Apply with a VA lender.
- Find a home.
- Complete VA Form 21-526EZ online here (Application for Disability Compensation and Related Compensation Benefits).
- The VA will review your application.
- If awarded disability, your lender may be able to remove the VA funding fee from your loan amount during the loan process.
- If you’re too close to closing and the loan amount can’t be changed, pay the VA funding fee as normal.
- Make sure the effective date of disability compensation is retroactive to before loan closing.
- Have your lender contact the VA to request the VA funding fee refund (they can do this even if your loan is already closed).
- Sometimes, the lender will still have the fee in its trust account. In this case, the lender can wire or ACH the funds back to your bank account.
- If funds have reached the VA already, work with the VA directly by calling 877-827-3702.
Admittedly, this sounds too good to be true. However, if you are awarded disability compensation with an effective date before loan closing, you are no longer required to pay the funding fee and it can be returned to you.
Requesting a refund after closing
You may be entitled to a VA funding fee refund after closing.
The main qualification is whether your disability compensation is retroactive to before loan closing.
Example 1: Not eligible for a refund
Your VA loan closed on October 15, 2022. You received disability compensation retroactive to November 1, 2022.
Example 2: Potentially eligible for a VA funding fee refund
Your VA loan closed on October 15, 2022. You received disability compensation retroactive to October 1, 2022.
If your situation isn’t as clear-cut, contact the VA home loan office at 877-827-3702.
Why you should apply for disability and how to do it
First, determine whether you have a specific disability relating to a service-connected event or a “presumptive” service connection.
If a specific event, you should gather any records relating to your disability. VA medical records, private medical records, and even statements from family, friends, coworkers, and anyone else with knowledge of your disability’s origin.
But the VA also maintains a list of “presumptive” conditions, where, if developed, can be assumed connected to service. This is where many veterans can be awarded disability (and therefore become VA funding fee exempt) but have not yet applied.
For instance, Gulf War Veterans who served in the Southwest Asia Theatre of Operations or Afghanistan, Syria, Djibouti, or Uzbekistan on or after September 19, 2001 and manifest asthma, rhinitis, or sinusitis (to include rhinosinusitis) within 10 years of separation from service may be classified as disabled and exempt from paying the funding fee.
Another example of a presumptive disability is one arising from exposure to toxic conditions around Afghanistan burn pits.
Check this document for presumptive conditions.
When you’re ready, head to the online VA Form 21-526EZ. You should log into your VA.gov account first so you can save your progress if needed.
Submit the application. The VA will review your claim. The amount of time it takes VA to review depends on a variety of factors including the disability claimed.
When complete, the VA will assign you a disability rating from 0-100%. You need just a 10% or greater rating for VA funding fee exemption.
If you are awarded the classification, show your lender the award letter upon applying for a VA loan. If you’ve already applied, still supply the lender with the notice from VA so that you can get your funding fee returned.
VA funding fee exemption FAQ
Maybe. Some conditions are considered “presumptive”, meaning the VA will assume it is connected to service if you served certain places at certain times. For instance, some Gulf War Veterans serving in Afghanistan after September 19, 2001 may be awarded disabled status for some conditions that develop after separation from service.
Yes. Lenders are not able to apply for exemption for you. Many Veterans could be exempt from paying the VA funding fee, but have never applied for disability. The lender will charge the funding fee unless the VA has already granted a disability rating of 10% or more. You can apply for disability on VA’s website here.
According to the VA, you may be eligible for a refund. The effective date of your VA disability compensation must be retroactive to before the loan closing. For instance, your loan closed on October 15 last year, and your disability compensation is retroactive to October 1 of the same year. Likewise, a disability designation awarded during the loan process entitles you to a refund, even if that refund has to be issued after closing the loan. However, a new disability won’t allow you to get a refund on a loan you closed a year ago. Those who think they might be eligible for a refund should call their VA regional loan center at 877-827-3702.
Don’t pay more than you have to for a VA loan
Even with the funding fee, VA home loans are hands-down the best loan type available on the market today, offering zero down and no monthly mortgage insurance.
Imagine how much better they are without the funding fee.
If you have any questions about VA home loans or funding fee exemptions, leave them in the comments below and I’ll do my best to answer.