The VA loan offers active troops and veterans an incredible mortgage option. But, to offset the costs of the program, the government charges many borrowers a funding fee. Fortunately, some veterans qualify for funding fee exemptions. And, if you’ve been incorrectly charged, a path exists to seek a refund. As such, we’ll use this article to explain how to get a VA loan funding fee refund.
Specifically, we’ll discuss the following:
- VA Loan Overview
- The VA Loan Funding Fee
- Getting a VA Loan Funding Fee Refund
- Final Thoughts
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VA Loan Overview
The VA loan program provides an outstanding home buying option for eligible borrowers. Administered by the Department of Veterans Affairs, these loans offer the following terms:
- No down payment required
- No private mortgage insurance (PMI) required
- Low interest rates
- Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)
But, it’s important to note that the VA doesn’t actually lend money. Instead, it guarantees a portion of every loan issued by VA-approved lenders (e.g. banks, credit unions, and mortgage companies). If a borrower defaults on a loan, the Department of Veterans Affairs will repay the lender a portion of the outstanding loan balance. While this program reduces the risk to lenders, it also costs the VA – and US taxpayers – money.
The VA Loan Funding Fee
To offset these VA loan costs, the VA charges a funding fee for its loans. More precisely, borrowers pay this fee due to the fact that the VA home loan program doesn’t require down payments or monthly mortgage insurance. And, the funding fee ranges from 1.4% to 3.6% of the loan amount, depending on both the down payment (if any) and borrower profile.
While borrowers can roll this fee into the loan balance and pay it off over time, they should still recognize that, the larger the loan, the larger the VA loan funding fee. In particular, the VA charges the following loan funding fee rates for veterans, active-duty troops, and National Guard and Reserve members:
- First-time borrowers, less than 5% down: 2.3%
- First-time borrowers, 5% or more down: 1.65%
- First-time borrowers, 10% or more down: 1.4%
- Subsequent loans, less than 5% down: 3.6%
- Subsequent loans, 5% or more down: 1.65%
- Subsequent loans, 10% or more down: 1.4%
As these rates illustrate, the VA generally charges higher funding fees for A) lower down payments, and B) multiple uses. In other words, if you use the VA loan a second or third time and don’t put any money down, you’ll pay a higher funding fee rate. For example, say you plan on purchasing a $250,000 home with no money down. If this is the first time using the VA loan, you’ll pay a funding fee of $5,750 ($250,000 x 2.3%). But, if using the VA loan a second time for this same $250,000 purchase, you’ll pay a funding fee of $9,000 ($250,000 x 3.6%).
VA Funding Fee Exemptions
Clearly, these funding fees can add thousands of dollars to your loan costs. If you pay the fee at loan closing, you need to come up with additional cash to close. Alternatively, you can finance the fee by rolling it into your loan amount. While this option saves you cash up front, it also means you need to pay more in interest over the life of a loan.
Fortunately, a third option exists: don’t pay the funding fee at all! But, this option only exists for certain borrowers. According to the VA, borrowers are exempt from paying VA loan funding fees if they are:
- Receiving VA compensation for a service-connected disability, or
- Eligible to receive VA compensation for a service-connected disability, but you’re receiving retirement or active-duty pay instead, or
- The surviving spouse of a Veteran who died in service or from a service-connected disability, or who was totally disabled, and you’re receiving Dependency and Indemnity Compensation (DIC), or
- A service member with a proposed or memorandum rating, before the loan closing date, saying you’re eligible to get compensation because of a pre-discharge claim, or
- A service member on active duty who before or on the loan closing date provides evidence of having received the Purple Heart
Getting a VA Loan Funding Fee Refund
When you apply for a VA loan, your lender will review your associated VA loan Certificate of Eligibility, or COE. This document will clearly state whether or not you qualify for a funding fee exemption under one of the above categories. However, your COE won’t say whether you may in the future receive an exemption. That is, if you have a pending disability rating when you close on the loan, you will still need to pay the funding fee at closing.
However, the VA also recognizes that some disability rating applications can take an extended period of time. And, during that time period, a veteran may apply for a VA loan, pay the funding fee, and then receive an exemption after closing. If the VA approves your pending claim after loan closing but with a retroactive date before closing, you can receive a funding fee refund.
Furthermore, you could potentially receive a refund despite having no pending claim at closing. That is, if the VA approves a disability claim application filed after loan closing but with a retroactive date before closing, you can still receive a funding fee refund.
Applying for the Funding Fee Refund
Due to the fact that you pay the funding fee directly to the VA, it is the VA that will ultimately decide whether or not you can receive a refund. To begin the refund process, you can either contact your original lender or your VA Regional Loan Center. According to the VA loan handbook, all refund requests must be reviewed and a decision made within 10-business days of the initial request date.
If, after applying for a refund, the VA approves your request, you will receive the refund in one of two ways, depending on how you initially paid the funding fee. If you paid the fee in cash at closing, you will receive a cash refund for the amount of the funding fee.
On the other hand, if you rolled your funding fee into the loan, several other possible outcomes exist. Generally speaking, the lender must apply the funding fee refund against the principal loan balance and submit evidence to VA that the refund was applied to the loan’s principal balance. But, here are the guidelines in case of several unique situations:
- If the loan is held by a servicer other than the original lender, provide the refund to the current servicer, and direct the servicer to apply the refund to the principal balance of the loan.
- If the loan has been refinanced with another VA loan, provide the refund to the current servicer and direct the servicer to apply the refund to the principal balance of the loan.
- If the loan is in default and the current holder objects to applying the refund to the loan balance, consult with Loan Administration to request intervention.
Final Thoughts
Yes, the VA loan absolutely provides eligible borrowers an outstanding mortgage option for buying a home. But, to offset the costs of the loan program, the VA funding fee can add thousands of dollars (or more). As such, borrowers should confirm whether or not they qualify for a funding fee exemption. And, if they don’t qualify at closing but receive a retroactive exemption later, they should take the necessary steps to get a refund on their VA loan funding fee.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
