It is possible to receive a refund on the VA funding fee. Borrowers may be eligible for a refund if awarded VA compensation for a service-connected disability - bearing the effective date of the VA compensation is retroactive before the VA loan closing.
If you're looking to use a VA-backed mortgage, odds are you'll run into the VA funding fee.
The VA funding fee is a set cost applied to most VA loans that helps cover losses if a VA loan goes into default. The funding fee applies to all purchase and refinance loans and is typically 2.15 percent of the loan amount for most first-time VA borrowers.
However, some Veterans are exempt from paying the VA funding fee, while others may pay the VA funding fee upfront yet qualify for a refund after closing.
Here we learn who qualifies for a VA funding fee refund and how to obtain that refund.
To be eligible for a VA funding fee refund, a Veteran must have a disability claim with an effective date retroactive to the closing date on their VA loan.
The most common instances for VA funding fee refunds are active duty service members with pre-discharge disability claims. Service members receiving a proposed or memorandum disability rating dated before their loan closing may be eligible for a funding fee refund.
The key is when the pre-discharge claim is adjudicated. According to VA policy guidelines, service members who receive a proposed or memorandum rating dated after closing on their VA loan are not eligible for a funding fee refund.
If you're unsure of your refund status, contact your lender, servicer or the VA Regional Loan Center at 1-877-827-3702.
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The process of getting your funding fee refunded is pretty straightforward. You have two options:
Talking with your mortgage lender or servicer is usually your best first step if you have questions about getting a refund of the VA funding fee.
Your Certificate of Eligibility (COE) typically denotes whether you're exempt from paying the funding fee. But there are times when things aren't as straightforward.
In some cases, borrowers will have a disability claim pending at the time of their loan closing. Others might be planning to file a claim at a later date. Depending on the circumstances, some borrowers will be eligible for a refund of the funding fee after closing.
In terms of the mortgage process, it's the lender's responsibility to verify the borrower's funding fee exemption status.
Lenders will rely on the VA for guidance. Veterans and service members will need to pay the funding fee at closing unless lenders have clear documentation from the VA indicating they're exempt, which includes borrowers with a pending disability claim.
Questions on funding fee exemption can be especially tricky for buyers transitioning from the service back into civilian life. The VA has updated guidance in this area in recent years.
Today, service members with a pending pre-discharge claim can be exempt from the fee, provided the lender obtains a proposed or memorandum rating from the VA prior to the loan closing. Without that documentation in hand, the buyer would not be exempt from the fee.
Since the VA funding fee goes directly to the Department of Veterans Affairs (VA), it's ultimately up to the VA to determine your refund eligibility.
Veterans entitled to a refund of their VA Funding Fee will receive it directly from the Department of Veterans Affairs. Mortgage lenders aren’t required to reduce the principal loan balance to reflect the refund.
Veterans who chose to finance the funding fee into their loan can keep the cash or choose to make a principal-only payment on their loan to reduce their overall loan balance. Doing that doesn’t change your monthly mortgage payment, but it can save on interest charges paid over the life of the loan.
Waiting for your refund can be frustrating, but processing VA funding fee refunds typically happens within 10 business days of your initial request.
If you paid the funding fee, you can write it off on your taxes as long as it’s within the same year you paid it. When the fee is refunded, however, you’ll be required to declare it as income on your tax return.
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