If you’re looking to land a VA-backed mortgage, you’re going to run into the VA Funding Fee. Ears perk up anytime the word “fee” is thrown around, which is understandable when it comes to homebuying. But this one has an important reason for being.
The VA Funding Fee has an escape clause, if you will, for disabled veterans and surviving spouses. Veterans and military buyers who receive compensation for a service-connected disability are exempt from paying the funding fee, which the Department of Veterans Affairs applies to every purchase and refinance loan it backs. So are veterans rated eligible to receive disability compensation as a result of a pre-discharge exam or review. Veterans on active duty who are entitled to receive disability compensation are also exempt.
In all, about a third of VA borrowers don’t pay this fee.
The funding fee goes directly to the VA and helps keep the program going for future generations of military homebuyers.
Your Certificate of Eligibility (COE) should denote whether you’re exempt from paying the funding fee. For most prospective borrowers, it isn’t too difficult to determine, even at the outset of your homebuying journey (for which you do not need your COE). But what about veterans who pay the VA Funding Fee and obtain a disability rating after they’ve closed on a home loan?
Depending on the specific circumstances, some homebuyers will be eligible for a refund of the fee, which for first-time buyers is typically 2.15 percent of the loan amount.
Funding Fee Payment
It’s the lender’s responsibility to verify the borrower’s Funding Fee exemption status. This is the only closing cost on a VA purchase that borrowers can finance, and most choose to roll it into their loan. Some will pay in cash at closing.
Lenders collect this fee at closing and send the money to the VA using a special payment system. Again, this money goes only to the VA and helps keep the loan program self-funded. That’s actually a pretty big deal, because leaving it subject to the Congressional budgeting and appropriations process could have significant impacts — and probably not good ones.
In some cases, it may be difficult for a lender to verify a veteran’s exempt status before loan closing. In others, the borrower will have a pending disability claim that isn’t settled before they complete the VA loan process, or he or she will seek a rating after closing. This is where things can get tricky. When either of these situations occurs, the VA instructs lenders to proceed as if the borrower isn’t exempt. That means these veterans pay the funding fee no matter what.
But the lender also lets the VA know the borrower believes he or she should be exempt. At that point, it’s up to the VA to evaluate the situation and determine if a refund is warranted.
Funding Fee Refund
Timing is everything in regard to disability ratings and a funding fee exemption. Generally, if you had a pending disability claim at the time of closing, you may be able to obtain a refund if the award comes in later.
If you pay the fee and then later learn you’re entitled to disability income retroactively to a date before your loan closing, contact your original lender/service about seeking a refund. You can also talk with your VA Regional Loan Center for information.
The VA refunds veterans based on how they paid the funding fee in the first place. If you paid it in cash at closing, you’ll get a cash refund. Veterans who pay the fee from loan proceeds will have their lender apply that overpayment to their loan balance.