VA Loan Funding Fee Refunds: Cash Back?
VA loans require payment of a VA loan funding fee. Some borrowers are exempt from paying this fee; the Department of Veterans Affairs does not require funding fees from veterans who receive (or are eligible to receive) VA compensation for service-related medical conditions.
But some vets don’t have official confirmation of their VA disability status when they are applying for a VA home loan.
In some cases, the veteran may be required to pay the funding fee and apply for a refund later when official notice is provided that the veteran’s disability status has been approved by the Department of Veterans Affairs. In these cases, a refund is due–but that refund is not automatic. Once the veteran gets notice of his VA disability rating, it’s up to the veteran to apply for the refund.
The real question in such cases isn’t whether or not the refund will be made, but how that refund is applied. VA loan rules forbid borrowers from getting cash back on new purchase transactions–does this rule also apply to funding fee refunds?
No, but the VA does have regulations on how the money is to be refunded based on how the funding fee was paid originally.
If the borrower paid the funding fee in cash, the refund is given back in the same way. But if the veteran included the VA loan funding fee into the loan amount, VA regulations prohibit getting cash back–the refund is applied to the loan balance instead. Here’s the exact wording of the VA loan rule as found in Chapter Eight of the VA Lender’s Handbook:
A refund is appropriate if:
- an exempt veteran paid a funding fee, or
- a miscalculation of the fee caused an overpayment.
If the veteran was overcharged, the following applies:
- A veteran who paid cash for the funding fee receives a cash refund for the amount of the overpayment.
In the case of a veteran who paid the funding fee out of loan proceeds, the lender must apply the overpayment against the loan balance. Submit evidence to VA that the refund was applied to the loan’s principal balance. ”
Do you have questions about the VA loan process? Ask us in the comments section.