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 every VA loan. Some Veterans are exempt from paying the fee, while others will receive their VA funding fee refund after closing.
This fee helps cover losses in the event a VA loan goes into default and keeps the VA loan program running for future generations of military homebuyers. The funding fee applies to all purchase and refinance loans and is 2.30 percent of the loan amount for most first-time VA borrowers.
However, there are circumstances where you’ll be required to pay the VA funding fee when you should’ve been exempt.
Veterans and military buyers who receive compensation for a service-connected disability don't have to pay this fee. Neither do surviving spouses, purple heart recipients, or 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.
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.
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.
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.
A VA loan is a mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs. Here we look at how VA loans work and what most borrowers don’t know about the program.
Your Certificate of Eligibility (COE) verifies you meet the military service requirements for a VA loan. However, not everyone knows there are multiple ways to obtain your COE – some easier than others.