VA Loan Funding Fee Exemption and Refund Rules for Disability Claims

The Quick Read: A veteran who receives VA disability compensation is exempt from the VA funding fee, and the exemption has to be established before closing to work cleanly. A claim that is merely pending does not exempt you. If the award is later made retroactive to a date before your closing, you may be able to request a refund, but nothing about that refund is automatic or guaranteed.

The whole topic comes down to one question: what did VA know about your compensation on the day you closed? Everything below follows from that. It covers who is exempt, how the exemption gets verified, what happens when a claim is still open, and where the general rule breaks.

What Is the VA Funding Fee, and Who Skips It?

The funding fee is a one-time charge, calculated as a percentage of the loan amount, that VA collects on most VA-guaranteed loans. It can be financed into the loan. Across the wholesale programs Lendmire places VA purchase loans with, the fee ranges from 1.25% to 3.3% depending on use and down payment. First use with less than five percent down is 2.15%. Five to under ten percent down is 1.5%. Ten percent or more down is 1.25%. Subsequent use with less than five percent down is 3.3%. These figures are subject to lender guidelines and full file review.

For an exempt borrower, none of that applies. Under 38 U.S.C. § 3729, VA may not collect the fee from these groups:

The Purple Heart exemption was added by Public Law 116-23, which the GovInfo copy of the Code reflects. Note the limit: it covers active-duty members who document the award by closing. A separated veteran with a Purple Heart has to qualify under the compensation prong instead.

Key Terms Defined

Funding fee: A one-time percentage-of-loan charge on VA-guaranteed loans that can be financed into the balance.

Exempt: Not required to pay the funding fee because of a statutory category such as receiving disability compensation.

Certificate of Eligibility (COE): The VA document lenders use to confirm your eligibility and funding fee status.

Effective date: The date VA says your compensation begins, which can be earlier than the date the decision was made.

Regional Loan Center (RLC): The VA office that handles status corrections and refund requests.

Pre-discharge claim: A disability claim filed by a service member before leaving active duty.

Does the Rating Percentage Matter?

The statute says “receiving compensation.” It sets no minimum percentage. What matters is whether you are actually receiving compensation. A 0% rating pays no compensation, so it does not create the exemption on its own. If you hold a 0% rating, ask your loan officer how it appears on your COE before you count on a waiver.

Many borrowers assume a rating of 10% or 30% is the cutoff. The statute does not say that. The test is compensation, not a threshold.

How Is Exemption Status Verified Step by Step?

The COE is the starting point. It shows funding fee status as Exempt, Non-Exempt, or Contact RLC. Here is how a file usually moves when exemption is in play:

1. Pull the COE early. The loan officer checks the funding fee status before the file is built around a closing-cost number.

2. If the COE says Non-Exempt or Contact RLC but you receive compensation, you supply your VA award letter. The lender submits VA Form 26-8937, Verification of VA Benefits, to the RLC so VA can correct or confirm the status.

3. Confirm before closing. VA Circular 26-23-19 says exemption status should be established before closing. It also says lenders must use due diligence and must not ignore information that could indicate an exemption.

4. Look at the Loan Estimate and Closing Disclosure. Both are consumer-mortgage documents. If you are exempt, the funding fee line should reflect it.

Across the wholesale VA programs we work with, the files that go smoothly are the ones where the award letter shows up in the first conversation, not the last week. Veterans often assume the lender “sees” their disability status automatically. It does not always show up that way on the COE.

The lender cannot waive the fee on its own. VA determines status. If status cannot be verified, the lender must remit the fee as though you were not exempt.

What Happens When Your Claim Is Pending at Closing?

If a disability claim is pending at closing, the fee is owed. The VA Lenders Handbook (VA Pamphlet 26-7), in its chapter on borrower fees and the funding fee, says the fee must be remitted as if the borrower were not exempt. The closing package should note that the veteran claims exempt status. VA then determines the status and refunds the fee if appropriate.

Here is the catch. VA’s circular tells lenders not to advise veterans who believe they are exempt to close and request a refund later. Refund determinations are specific to each veteran and cannot be guaranteed. A pending claim is a cash-flow and timing issue, not a plan.

Picture a borrower with a claim filed eight months ago and a purchase contract with a firm closing date. The fee, which is a percentage of the loan, will be paid or financed at closing. Whether any of it comes back depends on a decision VA has not made yet, and on the effective date VA eventually assigns. That is a decision worth making with the full picture in front of you, including whether the closing date can reasonably move.

The Date Test: When a Refund Is Possible

The refund test is simple to state and easy to misread. The question is whether your compensation effective date is retroactive to a date before your closing date.

Four dates get confused:

• Filing date: when you submitted the claim.
• Decision date: when VA issued the rating.
• Effective date: when VA says compensation starts.
• Closing date: when your loan closed.

Only the effective date versus the closing date decides refund eligibility. A decision that arrives after closing can still produce a refund if the effective date reaches back before closing. A decision that arrives after closing with an effective date after closing does not.

The handbook directs the veteran to contact the VA Regional Loan Center to request a refund when compensation is later found retroactive to a date before closing. Treat the request as something you start, not something that happens on its own. Check VA.gov for the current contact steps and payment method rather than relying on third-party summaries, since those vary.

Where the General Rule Breaks: Named Edge Cases

Pre-discharge claims. Active-duty members with a claim pending before discharge face a tighter rule. Per the circular, lenders should ask whether a pre-discharge claim is pending. The exemption depends on a proposed or memorandum rating being issued before closing. If none exists and you close before discharge, the exemption does not apply and VA will not refund the fee. A proposed or memorandum rating that arrives after closing does not create refund eligibility.

Retirement pay offset. A veteran who would be entitled to compensation but is receiving retirement pay instead is still exempt under the statute. This is a statutory exemption, so it is worth raising if your retirement pay offsets your disability payment.

Surviving spouses. The statute covers the spouse of a veteran who died in service or from a service-connected disability. VA guidance ties this to specific benefits, so a surviving spouse should have the COE reviewed early. Lendmire’s piece VA Cash-Out Funding Fee Exemption Rules for a Surviving Spouse goes further on that situation.

Refinances. Exemption is a status test, not a loan-type test, so it follows you into a refinance. The IRRRL, the VA streamline refinance, carries a 0.5% fee unless you are exempt, and per the circular it does not require a COE, with exemption status provided on the IRRRL. On a cash-out refinance the VA fee is 2.15% for first use and 3.3% after, again waived if exempt. One refinance rule worth knowing: under 38 CFR Part 36, any portion of a financed refinance funding fee that would push the loan above 100% of reasonable value must be paid in cash at closing. Whether a fee is financed does not change the exemption test.

Assumptions. The exemption concept applies, but the assumption fee is collected under different rules, so do not assume the seller’s status settles the question. Ask your loan officer before relying on it.

Six Misconceptions That Cost Veterans Money

1. “Everyone pays the fee.” Statutory exemptions exist.

2. “Filing a claim exempts me.” A pending claim does not exempt you.

3. “I can close now and get it back automatically.” VA says lenders should not advise this, because refunds cannot be guaranteed.

4. “Any later rating earns a refund.” Only compensation with an effective date before closing qualifies.

5. “A Purple Heart exempts any veteran.” It applies to active-duty members who document the award by closing.

6. “My lender can waive it.” The lender cannot. VA determines status.

How the Exemption Fits the Rest of the VA Loan

The exemption changes the cost of the loan, not its underwriting. The core structure stays the same. VA purchase loans through the wholesale programs Lendmire works with offer 100% financing when the price is not above appraised value, no mortgage insurance of any kind, and no VA loan limit with full entitlement. VA sets no minimum credit score, and those wholesale programs start at a 580 decision score. Residual income is the controlling test, and 41% debt-to-income is a guideline, not a cap. A higher ratio needs residual income well above the table. All of this is subject to lender guidelines and full file review.

Exemption helps two ways. It removes a closing cost that is a percentage of the loan. And if the fee would have been financed, it also removes a balance increase. Do not assume your COE or your lender will say how disability income should be counted. That is an underwriting question to ask directly, since the funding fee exemption and income treatment are separate topics.

If you want to see how the program works end to end, Lendmire’s VA loan programs page lays out the structure. Veterans who already hold a VA loan can also read Lendmire’s piece VA Cash-Out Funding Fee Rules for a Veteran With an Existing VA Loan.

Common Mistakes and What to Ask Your Lender

The mistakes tend to cluster around timing. A veteran waits until the final week to mention the award letter. A service member assumes a pre-discharge claim is as good as a rating. A buyer closes on a pending claim expecting a check later. None of these is hard to avoid if status is checked at the start.

Questions worth asking your loan officer:

• What does my COE show for funding fee status today?
• Do I need to supply my award letter, and will you submit Form 26-8937?
• If my claim is pending, what does my closing cost picture look like if the fee is owed?
• If my effective date turns out to be earlier than closing, what would I need to request a refund, and from whom?

Keep your award letter, your COE, your closing documents, and any VA correspondence together. A refund request rests on showing that the effective date precedes the closing date, so the paperwork matters.

If you are buying a home and want to see whether a VA loan fits your file, Lendmire can help you compare the options and what each one asks of the file. Nothing here is a commitment to lend, and every program figure is subject to lender guidelines and full file review.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. 38 U.S.C. § 3729

2. 38 U.S.C. § 3729 (GovInfo, 2022 Code)

3. VA Circular 26-23-19

4. eCFR 38 CFR Part 36