VA loans

Who is Exempt From the VA Loan Funding Fee?

September 23, 2010

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Who is Exempt From the VA Loan Funding Fee?

The Department of Veterans Affairs offers VA home loans to qualified veterans and their families—that’s common knowledge. What’s not so well known is how the government can afford to pay for this program. The VA loan program is paid for in part by the VA funding fee borrowers pay in addition to closing costs and other expenses related to buying a home.

Like many other aspects of buying a home, there’s no one-size-fits-all VA funding fee amount. The amount of the fee varies depending on a number of factors including how much (if any) down payment is made on the VA mortgage, and the military status of the applicant.

The VA doesn’t charge funding fees in all cases. There is a list of VA-approved circumstances that make the VA loan applicant exempt from having to pay this fee, which can be as much as 2.15% of the total loan amount in some cases. Who is exempt from paying the VA loans funding fee? According to the VA:

* Veterans who receive VA compensation for service‐related disabilities are exempt from the VA funding fee
* Veterans who are rated by VA as eligible to receive compensation as a result of pre-discharge disability examination and rating.Veterans who would receive compensation for service‐related disabilities if they did not receive retirement pay are also exempt
* Surviving spouses of military members who died on duty or who died or from service‐related disabilities as determined by the Department of Veterans Affairs are exempt

The existence of these situations that exempt the borrower from paying the VA funding fee aren’t’ enough. The VA requires the following documentation and paperwork:

* A VA Form 26-8937, Verification of VA Benefits, indicating the borrower’s exempt status
* For veterans who choose retirement pay instead of VA compensation, a copy of the original VA notification of disability rating

–and–

* Documentation of the veteran’s service retirement income

For surviving spouses, the VA requires a Certificate of Eligibility that shows the borrower is entitled as an unmarried surviving spouse.

2 Comments
  1. Chris

    Why will I have to pay a higher "funding fee" as a member of the Air National Guard then my active duty brothers? Thanks.

    • Joe Wallace

      That is a very good question! The VA does not explain why this is in the rules, unfortunately. In a FAQ list on the VA official site it simply states, "The VA funding fee is required by law. The fee is intended to enable the veteran who obtains a VA home loan to contribute toward the cost of this benefit, and thereby reduce the cost to taxpayers. The funding fee for second time users who do not make a down payment is slightly higher. The idea of a higher fee for second time use is based on the fact that these veterans have already had a chance to use the benefit once, and also that prior users have had time to accumulate equity or save money towards a down payment. First and second time users who make a down payment of at least 5 percent pay a reduced funding fee of 1.5 percent, the same as first time users making the same down payment. For a 10 percent down payment, the fee drops to 1.25 percent. The effect of the funding fee on a veteran's financial situation is minimized since the fee may be financed in the loan. National Guard and Reservist veterans pay a slightly higher funding fee percentage. To determine the exact funding fee percentage, please review the funding fee table."

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