How Your VA Disability Rating Impacts VA Home Loans

The VA mortgage program is probably one of the best benefits available for current servicemembers, Veterans and their families. It provides access to home ownership to anyone who has met military service requirements. However, if you’re a Veteran receiving VA disability pay, there are additional benefits you can receive that may save thousands of dollars when applying for a VA loan.

Let me walk you through the key differences in the VA loan process for those receiving VA disability compensation, different grants available for home improvements, real-world examples of how it can save you money on buying a home, and debunk some myths about VA disability and VA loans. 

VA Loan Benefits for Veterans Receiving Disability Compensation

If you don’t know, the biggest selling point for a VA loan is that it’s a zero-down payment loan option. On top of that, interest rates for VA loans tend to be lower than conventional mortgage loans, a VA loan doesn’t include private mortgage insurance (PMI), and also has a streamlined refinance option through the Interest Rate Reduction Refinance Loan (IRRRL). Those aspects already make it a cheaper option if you’re looking to buy a home. However, VA disability recipients receive additional financial perks.  

VA Loan Funding Fees

Veterans receiving VA compensation for a service-connected disability do not need to pay a VA loan funding fee. 

What is a VA loan funding fee? It’s a one-time fee the VA charges a Veteran when they receive a VA loan to help offset the costs of the VA loan program. Depending on the type of loan, this fee ranges from 0.5% to 3.3% of the total loan amount – potentially thousands of dollars. 

I want to look at the multiple ways not paying a funding fee can help home affordability. 

Example 1: If you’re buying a home for $350,000 with no down payment, and it’s a 30-year loan at 6% interest rate. Your loan would include a funding fee of $7,525, making the total loan $357,525. At that interest rate (assuming a property tax rate of 1.2% and homeowners insurance being roughly .35%) the monthly payment would be roughly $2,596 per month. 

Example 2: Let’s use the same information above, but let’s say you have a VA disability rating. You wouldn’t owe the funding fee, which immediately lowers the loan total to $350,000. With the same loan duration, property tax rate, and homeowners insurance rate, the monthly payment would roughly be $2,551 per month. 

The savings over the years totals approximately $16,200.

VA Disability as Income

VA disability pay comes as guaranteed monthly payments from the VA. An additional perk for VA disability recipients is that they’re able to count their monthly disability compensation as income. That’s helpful for qualifying for a VA loan. During the loan process, the lender will look over your financial paperwork to see if you make enough money to pay back the loan. Since some Veterans can work and accept VA disability pay, that VA disability pay may help boost the amount you’re able to borrow to buy your house. 

Property Tax Exemptions for Disabled Veterans

Veterans living with a disability may be eligible for property tax exemptions. Note: these are state-level policies, as there is no blanket policy for disabled veterans regarding property taxes on the federal level. Many states offer exemptions as reduced property tax burdens, or property tax totals capped at a certain amount. In some states, any veteran with a 100% permanent and total disability rating may be eligible for a complete exemption of property taxes. This can result in saving thousands of dollars a year as well, and even lowering your monthly mortgage. 

Example: Using the same example as above, let’s look at how your disability could affect your monthly mortgage payment. The $350,000 loan amount with no funding fee came to $2,551 a month, saving a little less than $50 per month, and about $16,200 over the life of the loan. With no property taxes in the payment, your monthly mortgage would come to ‌$2,201 per month. 

That would mean $350 dollars per month, and a difference of $126,000 over the life of the loan if you remain in the same location that exempts property taxes!

Now, extrapolating loan payments in these examples is more complex, but these examples serve as a real-world illustration that there are large financial benefits for disabled veterans hoping to use a VA loan to buy a home. I’d recommend you check with tax professionals about your status.

Grants & Programs For Disabled Veterans

Besides lower monthly mortgage costs, the following grants offer more benefits for veterans living with a disability to make improvements to homes:

• Specially Adapted Housing Grant (SAH): This grant helps a Veteran homeowner pay for specific changes to make the home more accessible for the service member based on medical and accessibility needs related to a qualifying medical condition(s).
• VA Special Housing Adaptation Grant (SHA): This grant helps Veterans buy, build, or modify a permanent residence or the residence of a qualifying family member where the Veteran will live full-time.
• VA Home Improvements & Structural Alterations Grant (HISA): This grant helps pay for improvements to make homes more accessible for disabled veterans, this grant does not have a list of qualifying medical conditions or injuries. (Requires written documentation from physician)
• VA Temporary Residence Adaptation Grant (TRA): This is designed to help pay for a Veteran living temporarily in a family member’s home which must be modified to become more adaptable for the Veteran.

There are more extensive rules and eligibility requirements for these programs, but if you believe you may qualify, I’d encourage comparing them and seeing if they would help you. 

VA Home Loans for Disabled Veterans Who Are Rated Incompetent

Suppose a Veteran is ruled incompetent due to health-related issues and cannot manage their benefits. In that case, the VA will appoint someone to receive and manage their disability compensation. To get a VA loan, the VA-appointed individual would need approval from the VA to close on a home. The VA review process, which can take a few months to complete, is aimed at ensuring the decision benefits the Veteran.

VA Loan Funding Fee Refunds After Disability Ratings Update

In the event you filed a VA disability claim before closing on your VA loan, but have not received a final decision from the VA, you will be required to pay the funding fee. However, if you receive a rating from the VA after closing, and the effective date is prior to your VA loan closing date, you will get your VA loan funding fee refunded. You’ll need to reach out to the VA to navigate through that process. 

VA Disability Myths Regarding VA Loans

Myth 1: You need a disability rating to qualify for a VA Loan

False. You do not need a VA disability rating to use your VA loan benefit. The VA loan is available to eligible service members and Veterans regardless of whether they receive disability compensation. Your military service, not your disability status, determines your eligibility.

Myth 2: A low disability rating disqualifies you from VA loan benefits

False. Whether your VA disability rating is 10% or 100%, you’re still eligible for the same key benefits, such as the VA funding fee exemption and the ability to use your compensation as qualifying income.

Myth 3: You can’t get a VA Loan if the VA has rated you Incompetent

False. You can still get a VA loan if the VA has deemed you incompetent, but your fiduciary will need to assist with the loan process. The VA will review and approve the transaction to ensure it’s in your best interest.

Myth 4: Property Tax Exemptions are automatically included with VA loans

False. Property tax exemptions for disabled Veterans are determined at the state level, not by the VA loan program. See the link above that breaks down state property tax exemptions for disabled Veterans. 

Final Thoughts

Veterans should not let confusion about disability ratings prevent them from pursuing a VA loan. The government authorized this outstanding benefit for all eligible veterans – not just ones with service-connected disabilities. However, as this article illustrates, a disability rating may help you during the VA loan process, and save you thousands of dollars down the road!