How to Avoid the VA Funding Fee

VA home loans offer benefits for eligible service members, veterans, and surviving spouses, including no down payment and no private mortgage insurance. These loans are backed by the Department of Veterans Affairs (VA). A standard component of these loans is the VA funding fee, which helps sustain the program for future generations of borrowers. Understanding this fee is important, as certain circumstances may allow for an exemption.

Understanding the VA Funding Fee

The VA funding fee is a one-time charge paid directly to the Department of Veterans Affairs. This fee supports the VA home loan program by offsetting the costs of the loan guaranty program, which enables lenders to offer favorable terms such as no down payment and no monthly mortgage insurance.

The funding fee is a percentage of the total loan amount, varying based on factors like loan type, first-time or subsequent use of the VA loan benefit, and down payment amount. For instance, first-time VA loan users with no down payment might pay 2.15% of the loan amount, while subsequent users without a down payment could face 3.3%. A down payment of 5% or more can lower the fee to 1.5% for both first-time and subsequent users. The fee can be paid upfront at closing or financed into the loan amount.

Eligibility for Funding Fee Exemptions

Certain individuals are exempt from paying the VA funding fee, which can result in savings on their home loan. These exemptions are extended to those with service-connected disabilities or specific combat distinctions. The Department of Veterans Affairs outlines specific criteria for these waivers.

Veterans receiving VA compensation for a service-connected disability are exempt from the funding fee, regardless of the percentage of disability. Veterans eligible for VA compensation but receiving retirement or active-duty pay instead also qualify.

Another category includes veterans with a proposed or memorandum rating from the VA, indicating eligibility for compensation based on a pre-discharge examination or review, provided this rating is dated before the loan closing. Active-duty service members awarded the Purple Heart are also exempt. Surviving spouses of veterans who died in service or from a service-connected disability are also exempt, especially if they are receiving Dependency and Indemnity Compensation (DIC).

Documentation and Verification of Exemption Eligibility

To confirm eligibility for a VA funding fee exemption, specific official documentation is required as proof of the qualifying condition or status. The type of document needed aligns with the exemption category.

For veterans receiving VA compensation for a service-connected disability, an official VA award letter or benefit letter indicating receipt of such compensation is sufficient. Veterans entitled to compensation but receiving retirement pay instead may need to provide a copy of their original VA notification of disability rating along with documentation of their service retirement income.

Active-duty service members awarded the Purple Heart must provide proof of this award. Acceptable documents include a Purple Heart Certificate, a DD214 showing the Purple Heart award, or official military orders. For surviving spouses, a VA award letter indicating Dependency and Indemnity Compensation (DIC) and a marriage certificate are required. Lenders often use the Certificate of Eligibility (COE) to verify exemption status, as this document often reflects whether a borrower is exempt.

The VA, often through the lender, verifies eligibility using official VA systems. Borrowers should ensure their VA records are current and accurate, as discrepancies can delay the verification process. While lenders can assist, the ultimate determination of exemption status rests with the VA.

Process for Claiming a Funding Fee Exemption

Claiming a VA funding fee exemption involves procedural steps during the loan application process. The borrower’s primary role is to inform their lender of their potential exemption status and provide the necessary documentation. This initiates the verification process with the Department of Veterans Affairs.

Upon notification, the lender will access the VA’s systems, often through the Certificate of Eligibility (COE), to confirm the exemption. The COE may already indicate the borrower’s exempt status, streamlining the process. If the exemption is not immediately apparent, the lender may request additional supporting documents from the borrower, such as VA award letters or Purple Heart citations. This information allows the lender to submit a request to the VA for confirmation.

Once the VA confirms the exemption, the funding fee is waived, meaning it will not be included in the loan amount or closing costs. If a borrower’s disability claim is pending at the time of loan closing, the funding fee may be charged, but a refund can be pursued once disability compensation is approved and made retroactive to before the loan closing date. Borrowers should maintain open communication with their lender and ensure all VA records are up-to-date to facilitate a smooth and accurate application of the exemption.