Home  »  Finance   »   VA Loan Funding Fee Exemptions For Disabled Veterans

VA Loan Funding Fee Exemptions For Disabled Veterans

Joe Wallace

The Department of Veterans Affairs has issued new guidance on VA loan funding fees and their exemption for disabled veterans.

Some who filed pre-discharge claims with the VA found themselves in a gray area where VA loan funding fees are concerned, as discussed below. The VA updated its policies, intending to eliminate that gray area.

That update includes a requirement for a military member with a pre-discharge claim to get a VA rating prior to the loan closing to qualify for a VA loan funding fee exemption OR pay the VA loan funding fee as a non-exempt borrower if that rating is not determined by closing time.

If you haven’t reviewed your VA home loan benefits in a while, you may be surprised at some of the changes to your benefits that happened in the meantime. The VA policies discussed below are part of those changes.

VA Loan Funding Fee Policy

Before we can talk about changes to the policy, it helps to know what those changes affect. The VA Loan Funding Fee is described at VA.gov as, “a one-time payment that the Veteran, service member, or survivor pays on a VA-backed or VA direct home loan.”

This fee is paid as part of your closing costs.

The funding fee is meant to reduce the tax burden for operating the VA loan program. Those who buy or refinance a home will pay this fee unless they meet VA exemption requirements.

Who Is Exempt from the VA Loan Funding Fee?

Typically, those who receive or are eligible to receive VA disability payments may apply for an exemption from the VA loan funding fee. Here is the full list, as published by VA.gov. You are exempt from the VA Loan Funding Fee when:

• You’re receiving VA compensation for a service-connected disability, or
• You’re eligible to receive VA compensation for a service-connected disability, but you’re receiving retirement or active-duty pay instead, or
• You get Dependency and Indemnity Compensation (DIC) as the surviving spouse of a Veteran, or
• You’re a service member on active duty who, “before or on the loan closing date, provides evidence of having received the Purple Heart.”

But there is an additional category. According to VA.gov, you are also exempt from the fee if you “received a proposed or memorandum rating before the loan closing date that says you’re eligible to get compensation because of a pre-discharge claim.”

The Problem With the VA Loan Funding Fee Exemption

The main issue, for this article is that some veterans were left in a gray area when applying for VA benefits before being discharged.

A veteran awaiting a VA decision on her disability claims and with a VA home loan application pending may not have that VA decision in hand when it’s time for the lender to charge the VA loan funding fee.

Does this veteran pay the funding fee? Does the lender exempt them from paying the fee even though the claim is not yet approved or denied? Or does the veteran pay the fee and apply for a refund later if/when the VA claim is approved?

In the past, veterans had to pay the fee and apply for a refund later if entitled to one. The VA has clarified this policy, as we’ll discover below.

Updated VA Loan Funding Fee Policy

VA Circular 26-22-12 describes the enhanced VA Loan Funding Fee rules starting with a description of how the process is meant to work.

When a veteran applies for a VA loan with a participating lender, they are required to submit VA Form 26-8937, Verification of VA Benefits which is, in this case, according to VA.gov, “for active-duty Servicemembers with a pre-discharge claim pending.”

The pre-discharge claim for VA disability benefits is filed prior to the servicemember retiring or separating.

The VA added a step in the VA loan process; the lender is notified when VA Form 26-8937 has been received at the VA, and a pre-discharge disability rating request is underway. The VA searches the records and then:

• Suppose the applicant does not have a pre-discharge claim pending. In that case, VA will annotate the borrower’s Certificate of Eligibility with a VA Loan Funding Fee status of Non-Exempt, meaning the fee must be paid.
• According to VA.gov, If the applicant is eligible for a VA home loan, “and VA records indicate the Service member’s pre-discharge claim has been adjudicated, VA will update the COE with the appropriate funding fee status and issue the COE.”
• By this, we infer the VA to mean that the status is updated as exempt because the VA approved the disability claim and disability pay, or that the VA denied the claim and the funding fee status would be “non-exempt”.
• If VA records show that the applicant has a pre-discharge claim pending that has not been adjudicated, VA will “submit the rating request to the Veteran Service Center (VSC).
• VA will update the COE funding fee status to Non-Exempt – In Development and issue the Certificate of Eligibility”. According to VA.gov, in such cases, the service member “is not exempt at this time.

VA.gov adds that in cases where “a proposed or memorandum rating is not obtained, and the loan closing takes place before the Veteran is discharged from service, the funding fee exemption does not apply, and the Service member will not be entitled to a refund.”

More Resources For Requesting A VA Loan Funding Fee Refund

VA Form 26-0952, Counseling Checklist for Military Homebuyers, has instructions on pursuing an exemption from the VA funding fee if you have a pending pre-discharge claim.

• Those instructions include taking the time to notify the lender of your pre-discharge claim. Don’t assume the lender knows.
• You must obtain a VA rating and have it officially listed in your records in order to be approved for an exemption of the funding fee.
• If your loan closes before your rating is approved, you may not be entitled to a refund.