The VA loan funding fee is an expense associated with buying a home with the VA home loan benefit. This fee, required by law, is designed to help offset the taxpayer burden of the VA loan program and the fee varies depending on several factors including whether you have used the benefit previously or not.
In 2019, changes to the VA loan program brought modifications including a new approach to dealing with issues related to VA borrowers who may be exempt from having to pay the funding fee. Still more changes came in 2020 thanks to legislation which eliminated VA loan guaranty limits, changed the funding fee structure, and added more rules to allow active duty Purple Heart recipients to apply for a funding fee waiver.
The VA pays as much as $100 million per year in VA loan funding fee refunds, so it’s not safe to assume you aren’t entitled to one–if you meet the criteria, you should definitely contact the VA. We’ll examine the VA loan funding fee refund issue at the end of this article.
How The VA Loan Funding Fee Works
The rules governing the VA loan funding fee are found in Chapter 8 of the VA Lender’s Handbook. The first part of Chapter 8 reminds us that the VA loan funding fee is meant to offset the use of tax dollars, but also that the funding fee is subject to change or revision by Congress.
The fee should not be confused with other expenses of the loan such as the lender’s flat fee, which is separate from the VA loan funding fee.
Applying for a VA home loan involves several steps the lender is required to take which include:
- Identifying whether the applicant is exempt from paying the VA loan funding fee (more on that subject below).
- Calculating the VA funding fee owed by any non-exempt borrower.
- Collect the non-exempt borrower’s funding fee at loan closing time.
- Send proof to the Department of Veterans Affairs that the funding fee has been paid or that the veteran is exempt from the fee (see below).
The basic chain of events for the lender to calculate the borrower’s funding fee is more or less as follows:
- The borrower applies for the VA loan and submits a VA Certificate Of Eligibility (VA COE).
- The lender processes the loan application, reviews the COE to check the borrower’s status as a first-time applicant, second-time use, etc.
- The VA Loan Funding Fee is calculated using a table referencing the borrower’s status as a first-time user, active duty/Guard/Reservist/Retired or Separated status, etc.
- The borrower chooses to finance the fee or pay it as part of the cash required to close the loan.
The borrower’s status as a first-time user or “subsequent use” applicant is listed on the COE. So is the borrower’s current status as being exempt or not exempt from paying the VA loan funding fee.
The funding fee itself is calculated as a percentage of the loan amount and is completely separate from any required fees such as the lender’s flat fee, any down payment required when the appraised value of the home comes in lower than the asking price, etc.
The VA Loan Funding Fee Can Be Included In The Loan Amount
The funding fee is unique among VA loan expenses and closing costs since it can be included in the loan amount. Chapter Eight explains, “For all types of VA loans, the loan amount may include the VA funding fee.”
It also clarifies the next question on the minds of some borrowers–what OTHER costs can be rolled into the loan amount? According to Chapter 8, “No other fees and charges or discount points may be included in the loan amount” for purchase loans and VA construction loans.
VA refinance loans can include other fees aside from the VA loan funding fee, but you will need to discuss that with a loan officer to see what is possible at that financial institution.
Calculating The VA Loan Funding Fee
In the past, four variables affected the amount of a VA loan funding fee. Those variables included the nature of your military service–the VA loan fee was different for members of the Guard and Reserve. Starting 1 January 2020, the funding fee structure changed to make the amounts equal for all regardless of active duty status, Guard, Reserve, etc.
The other variables still apply–first-time users of the VA loan benefit still get the lowest funding fee with 10% down on the loan. The nature of your loan (construction loan, purchase loan for existing construction, VA Streamline Refinancing, etc.) may also affect the calculation of the funding fee.
In cases where more than one borrower chooses to buy a home using VA loan benefits, the funding fee is divided equally among the co-borrowers. Those who are not using their VA home loan benefits in the transaction are not charged the lender’s fee, only those using VA loan entitlement.
Down Payments Can Also Affect The VA Loan Funding Fee
VA loans are very popular thanks in part to the 0% down payment requirement. No money down is a huge advantage, especially for a first-time home buyer. But those who are not exempt from the VA loan funding fee may want to consider making a down payment because it can lower the amount of your funding fee.
The VA loan funding fee is reduced for those who pay at least 5% down, and the lowest possible VA loan fee is offered to those who put 10% down.
How Much Are The VA Loan Funding Fees?
Effective January 1, 2020, the Department of Veterans Affairs will use the following VA loan funding fee schedule:
All recipients of VA home loans must pay the funding fee in order to obtain a VA loan unless they are exempt because they receive or are eligible to receive VA compensation for service-connected disabilities.. The amount of the fee is based on the following scale:
- First-time use with no money down – 2.3%
- 5 percent down – 1.65%
- 10 percent down – 1.4%
Second-time use VA loan funding fees are as follows:
- First-time use with no money down – 3.6%
- 5 percent down – 1.65%
- 10 percent down – 1.4%
Some Veterans Are Exempt From The VA Loan Funding Fee
Some borrowers will never have to worry about paying the VA loan funding fee because they are (or soon will be) exempt from it due to their status as described below:
- Those currently paid VA compensation for a service-connected disability.
- Those who qualify for such compensation but choose to receive retirement or active duty pay instead.
- Veterans eligible to receive VA compensation “as a result of pre-discharge disability examination and rating or on the basis of a pre-discharge review” of existing medical evidence.
- Surviving spouses of veterans who died while on duty or from a service-connected disability.
- Active duty Purple Heart recipients who furnish proof of the award to the lender prior to loan closing
There is a slight catch. In order to get your exemption from paying the funding fee, your VA Certificate of Eligibility must reflect your status as being “EXEMPT”.
If the VA is still processing your medical claims at the time the loan application is being reviewed, you may not have an official VA rating on the books.
In such cases, you may be required to pay the VA loan funding fee and apply for a refund once you have your official VA disability rating in your records.
Some veterans don’t realize (or forget) they are exempt or will become exempt once the VA records are updated–don’t forget to investigate your options for a VA Loan Funding Fee refund. Talk to your loan officer or call the VA directly at 1-800-827-1000 to get instructions on claiming your refund.
How Your Lender Verifies Your Exempt Status
The VA Lender’s Handbook says the loan officer must verify a VA loan applicant’s exempt status with one of the following:
- A completed VA Form 26-8937, Verification of VA Benefits, indicating the borrower’s exempt status.
- In cases where the borrower chose to draw retirement pay instead of VA compensation, a copy of the original VA notification of disability rating and documentation of the veteran’s service retirement income.
- Certificate of Eligibility (COE) notes indicating the borrower is an unmarried surviving spouse.
VA Loan Program Changes That Affect Those Who May Be Exempt From The Funding Fee
In addition to the Purple Heart recipient rule (see above), the VA has changed other aspects of the VA loan funding fee exemption.
In May of 2019, the Department of Veterans Affairs announced changes to how it notifies veterans of their exempt status. In general, the VA official site reminds that a refund may be owed, “if you had a disability compensation claim pending at the time of loan closing and were later awarded service connected disability compensation.”
However, the date the disability compensation becomes effective, “must be retroactive to a date prior to the date of loan closing.”
Thanks to the 2019 changes in VA policy, borrowers who become eligible for exempt status due to receiving or being eligible to receive VA compensation will be notified in their VA award letters as well as a modified “home loan welcome” letter “to make sure Veterans know they may qualify for a loan fee waiver, should they later obtain a VA disability compensation award” according to VA.gov.
These notifications are not the only changes, though they definitely help the borrower better understand when they become eligible for exempt status.
Other changes to the VA program include a rule for VA loan funding fee refunds. In the past these refunds were required to match how the borrower dealt with the fee–those who had the funding fee rolled into the loan amount were required to have the refund applied to the principal balance of the loan.
Under the 2019 changes, all VA loan funding fee refunds are now (as of July 1, 2019) rendered directly to the borrower regardless of how they were initially handled.
If you feel that you are entitled to a refund of the VA funding fee, call the VA directly at 1-800-827-1000 to learn how to start the process. You can also call your loan officer.
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