A majority of borrowers using the VA loan must pay a funding fee. However, some people are exempt. How do you know who is exempt?
Veterans injured during the line of duty may be eligible. If they receive disability compensation or are eligible to receive it, they don’t pay a funding fee. Veterans receiving retirement pay rather than disability pay may be eligible. As long as they have a disability rating, they may not pay a funding fee. Also, surviving spouses of veterans who lost their life during service are eligible.
What is a Funding Fee?
The VA program is a self-sustaining program. Tax dollars don’t fund the program. Instead, the VA stays solvent with the funds collected from the funding fee. It’s a fee you pay upfront. You only pay it once. Some borrowers do roll it into their loan amount. It doesn’t affect your LTV, though. You can still borrow 100% of the purchase price of the home.
Today, the funding fee equals 2.15% of the loan amount for first-time users. On a $200,000 loan, this means $4,300. If you are exempt from the funding fee, this is a significant savings. Keep in mind, you aren’t automatically eligible for exemption. You must prove you don’t owe the fee. In some cases, you may even pay the funding fee and receive reimbursement later.
Varying Funding Fees
The 2.15% funding fee pertains to veterans active in the military and first-time users. The rates can vary from 0.5 to 3.3 percent, though.
For example, a borrower uses his first-time VA benefits for a home purchase. A few years later, he sells the home and purchases another. He uses VA funding for the second home purchase as well. The 2nd time around, the funding fee is 3.3%. On a $200,000 loan, this equals $6,600.
Now let’s say you keep your original home. If your interest rate is high, you may benefit from a refinance. The VA offers the Interest Rate Reduction Refinance Loan. You can refinance with very little verification. You must prove you made your mortgage payments on time. The lender doesn’t require proof of income, assets, or even your credit score. You don’t even need an appraisal. This program only requires a funding fee of 0.5%.
How do you Prove you are Exempt From the Funding Fee?
Proving exemption from the funding fee requires official proof. If you received your disability rating before you applied for the loan, your status may be on your Certificate of Entitlement. Lenders must have your COE before funding a VA loan. This makes it easy to prove your status.
If your COE doesn’t show your disability rating, though, you must provide VA Form 26-8937. This is the Verification of VA Benefits. It shows your eligibility for a VA loan. It also shows any disability ratings you have. If you receive retirement payments rather than disability, you must furnish the following:
- Documents showing your VA disability rating
- Proof of receipt of your VA retirement income
Sometimes, you can’t furnish these items before applying for a VA loan. In this case, you may be eligible for a VA funding fee refund. We discuss this below.
Obtaining a VA Funding Fee Refund
If you can’t prove exemption from the VA loan funding fee, you must pay it. Borrowers who may be eligible in the near future may get a refund. The disability must be dated prior to application of the VA loan, though. In this case, you pay the funding fee at the closing. You then receive a refund after your ratings come through.
The method you paid the funding fee will determine how you receive a refund. If you pay the fee at the closing, you receive a check from the VA. If you wrap the fee into your loan, you receive a principal reduction for the amount of the funding fee paid.
If you are eligible for a refund, contact your loan servicer right away.
Qualifying for a VA Loan
In order to qualify for a VA loan, you must prove you can afford the loan. It’s not enough that you are a veteran. It’s also not enough if you have the Certificate of Entitlement. You must prove you can pay the loan. The qualification requirements are as follows:
- Credit score of at least 620 or higher
- Meet the disposable income requirements for your area
- Total debt ratio no higher than 41%
- Purchase a home that passes the VA appraisal
The VA guidelines are flexible and often easier than conventional loan guidelines. Lenders can add their own requirements onto the loan, though. These are the VA’s minimum requirements. Lenders fund the loan, though; the VA doesn’t. Some lenders are more cautious than what the VA requires. For example, they may require a 650 credit score or a total debt ratio of 39%. You won’t know what a lender requires until you ask, though.
Whether you are exempt from the VA funding fee or not, you should shop around. Different lenders charge different fees and interest rates. You can save the most and get the best terms by shopping around. Try applying with at least 3 lenders. This way you know what you have available to you. Then you can look at the big picture and decide.
If you don’t owe the funding fee, it can lower your closing costs. Even if you pay it upfront, you’ll get it back if you have the right documentation. Talk to your servicer about the requirements before closing on a loan. This way you can make sure you take the appropriate steps to receive your refund should you pay the fee upfront.