Who is Automatically Exempt from the VA Loan Funding Fee?
The VA loan program is a powerful benefit for service members, veterans, and eligible surviving spouses, but the VA funding fee can add a significant cost to the loan. This fee, which helps to offset the program's cost to taxpayers, is typically financed into the total loan amount. However, many veterans are completely exempt from paying it. Understanding if you qualify for this waiver is the first step toward substantial savings.
Automatic exemption is granted to specific groups who have sacrificed greatly or are dealing with service-related disabilities. The exemption isn't a special request you have to make; it's a right based on your service and disability status. If you fall into one of the following categories, you should not pay the funding fee:
- Veterans Receiving VA Disability Compensation: Any veteran who receives compensation for a service-connected disability is exempt. This is the most common reason for a waiver.
- Veterans Entitled to Receive Disability Compensation: If you are eligible to receive disability compensation based on a pre-discharge examination or rating but have chosen to receive retirement or active-duty pay instead, you are still exempt.
- Surviving Spouses: An eligible surviving spouse of a veteran who died in service or from a service-connected disability, or who was totally disabled, is exempt. The surviving spouse must be receiving Dependency and Indemnity Compensation (DIC).
- Active-Duty Purple Heart Recipients: An active-duty service member who provides evidence of having been awarded the Purple Heart is exempt from the funding fee. The exemption applies while they remain on continuous active duty.
How VA Disability Compensation Affects the Funding Fee in Houston
For veterans buying a home in Houston, a VA disability rating is the most direct path to a funding fee waiver. The rule is simple: if you currently receive any level of compensation for a service-connected disability, you are exempt. The percentage of your disability rating does not matter, whether it's 10% or 100%.
This exemption can translate into massive savings. For example, consider a veteran making a first-time home purchase in Houston for $400,000 with no down payment. The standard funding fee for this scenario is 2.15%, which amounts to $8,600. This $8,600 would typically be added to the loan balance, increasing the principal and the monthly payment. For an exempt veteran, this cost is completely eliminated.
What About Pending Disability Claims?
A crucial point for veterans in the process of applying for disability benefits involves the timing. If you have a disability claim pending with the VA before your loan closing date, you may be eligible for a refund. If the claim is later approved and your benefits are awarded retroactively to a date prior to your closing, the VA will refund the funding fee you paid. It is vital to inform your lender about any pending claims so they can properly advise you on the potential for a future refund.
Your Certificate of Eligibility (COE) and Your Exemption Status
The Certificate of Eligibility (COE) is the foundational document for any VA loan. It's the VA's official confirmation that you meet the minimum service requirements to qualify for the benefit. Critically, the COE is also the primary document your lender will use to determine if you are exempt from the funding fee.
When your lender obtains your COE, they will look for a specific code that indicates your status. The key information is listed under the 'Funding Fee' section:
- If the COE states 'EXEMPT' or displays exemption code '01', your lender has the official confirmation they need. No further documentation is required to waive the fee.
- If the COE states 'NON-EXEMPT' or is blank in that section, the lender will assume you are required to pay the fee unless you provide alternative proof.
If you know you are exempt but your COE doesn't reflect it, don't panic. This can happen if your disability rating was awarded after your last COE was issued. In this case, you will need to provide your lender with other official VA documentation, such as your VA award letter, to prove your status.
Getting a Funding Fee Refund on Your Dallas Home Loan
Many veterans in Dallas and across Texas have paid the VA funding fee without realizing they were exempt. The good news is that you can get this money back. The process for securing a refund depends on the circumstances of the original payment.
Scenario 1: You Were Exempt at Closing but Paid Anyway
This can happen due to a clerical error or if your COE was not up-to-date at the time of your loan application. If you have documentation proving you were receiving VA disability benefits at the time of your closing, you can apply for a refund.
Scenario 2: Your Disability Was Approved Retroactively
This is a common situation. You may have closed on your Dallas home while your disability claim was still pending. If the VA later approves your claim and sets an effective date for your benefits that is prior to your loan's closing date, you are entitled to a full refund of the funding fee.
Steps to Request a Refund:
- Gather Your Documents: You will need a copy of your settlement statement (Closing Disclosure or HUD-1) from your home loan closing and your official VA notification letter that confirms your disability award and its effective date.
- Contact Your VA Regional Loan Center (RLC): Do not contact your lender. The VA handles all funding fee refunds directly. You will need to submit your documentation to the RLC with jurisdiction over your property. You can find your RLC on the VA's website.
- Wait for Processing: The VA will review your case and, if approved, issue a refund directly to you. The process can take several weeks or months, so patience is key.
Funding Fee Rules for Subsequent Use of a VA Loan
The VA funding fee structure changes depending on how many times you have used your VA loan benefit. For veterans who are not exempt, the fee increases for each subsequent use. This makes proving your exemption status even more valuable on your second or third VA-backed mortgage.
Here’s a simplified breakdown for loans with no down payment:
- First-Time Use: 2.15% for Veterans and 2.4% for Reservists/National Guard.
- Subsequent Use: 3.3% for all branches.
(The data, information, or policy mentioned here may vary over time.)
Imagine a veteran who is not exempt and is buying their second home in Texas for $450,000. The subsequent use funding fee would be $14,850 (3.3% of $450,000). This is a substantial amount added to the loan. However, if that same veteran has a disability rating, the fee is $0. The exemption applies every single time you use the VA loan benefit, regardless of whether it's your first home or your fifth.
Are Surviving Spouses Exempt from the Funding Fee in San Antonio?
Yes, certain surviving spouses are eligible for both the VA loan benefit and the funding fee waiver. This is a critical benefit that helps military families who have lost a loved one. When considering a home purchase in a city like San Antonio with a large military population, understanding these rules is essential.
To qualify for the VA loan benefit and the funding fee exemption, a surviving spouse must meet one of the following conditions:
- Be an un-remarried spouse of a veteran who died in service or from a service-connected disability and be receiving Dependency and Indemnity Compensation (DIC).
- Be the spouse of a service member who is missing in action (MIA) or a prisoner of war (POW) for at least 90 days.
The key requirement for most surviving spouses is the receipt of DIC benefits. If you are a surviving spouse who meets these criteria, your COE will be marked 'EXEMPT', and you will not have to pay the funding fee on your San Antonio home loan.
How to Provide Proof of Exemption to Your Lender
Being proactive is the best way to ensure a smooth and cost-effective VA loan process. If you believe you are exempt from the funding fee, you must provide your lender with the correct documentation early on. Don't assume they will know your status.
Follow these steps to ensure your exemption is applied correctly:
- Obtain Your Most Recent Certificate of Eligibility (COE): Before you even apply for a loan, you can get your COE through your lender, online via the VA's eBenefits portal, or by mail. Check to see if it lists your status as 'EXEMPT'.
- Prepare Your VA Award Letter: If your COE is not updated, your official VA disability award letter is the definitive proof. This document states your disability rating and the date your benefits began. Provide a clear copy to your loan officer.
- Provide a Statement of Service (for Purple Heart Recipients): An active-duty service member who has been awarded the Purple Heart will need to provide official military documentation of the award to their lender.
- Communicate Clearly and Early: Tell your loan officer on day one that you are exempt from the funding fee. This allows them to structure your loan estimate correctly from the start and prevents any confusion or delays down the line.
VA Funding Fee vs. Other Closing Costs
It is common for homebuyers to confuse the VA funding fee with other closing costs. While both are paid at closing (unless the funding fee is financed), they are fundamentally different. Understanding this distinction helps you better anticipate your out-of-pocket expenses.
The VA Funding Fee
- Purpose: It's an insurance fee paid directly to the Department of Veterans Affairs. It helps sustain the VA loan program for future generations by covering losses from loans that may go into default.
- Financing: It can be rolled into the total loan amount, meaning you don't have to pay it in cash at closing.
- Recipient: The VA.
Other Closing Costs
- Purpose: These are fees paid to various third-party vendors for services required to complete the mortgage transaction. These are known as 'allowable fees' under VA guidelines.
- Examples: Appraisal fee, credit report fee, title insurance, recording fees, and survey fees.
- Financing: These costs cannot be rolled into the loan amount. They must be paid by the buyer or covered by seller concessions or a lender credit.
- Recipient: Title companies, appraisers, county governments, and other service providers.
(The data, information, or policy mentioned here may vary over time.) If you are a veteran in Texas and have questions about your eligibility for a VA loan or the funding fee waiver, it’s crucial to work with a mortgage expert who understands the nuances. A specialist can help you gather the right documents and ensure you don’t pay a penny more than necessary.
Understanding your exemption status is a powerful first step toward making your homeownership goals a reality. When you're ready to move forward and see what you qualify for, our team is here to help. Apply now to begin your application and get personalized guidance from our VA loan specialists.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
