How to Reduce or Avoid the VA Loan Funding Fee

The Quick Read: You avoid the fee only through an exemption, most often VA disability compensation. Everyone else can shrink it with a bigger down payment, or soften its cost by paying it in cash instead of financing it. VA sets the fee, so no lender can discount it. Every figure here is subject to lender guidelines and full file review, and nothing is a commitment to lend.

What the Funding Fee Actually Is

The funding fee is a one-time charge on most VA loans. It is not mortgage insurance, and the lender does not keep it. VA sets the amount. Per Chapter 8 of the VA Lenders Handbook, the lender collects it at closing and passes it to VA.

That fact changes how you shop. You cannot compare lenders on the fee, because it is identical everywhere. You have three levers:

• Exemption. The only route to zero.
• Down payment. Moves you into a lower fee tier.
• Loan type. A streamlined refinance carries a far smaller fee than a purchase.

A fourth lever is who pays. The seller can cover the fee as a concession, within VA’s concession limit.

Across the wholesale programs Lendmire places VA loans with, the fee is also the one cost most buyers can roll into the loan. That choice has a price, covered below.

What Drives the Amount?

Three things decide your fee: the loan type, your down payment, and whether you have used the VA benefit before. The fee is a percentage of the loan amount, so a larger loan means a larger fee.

On a purchase:

Notice that once you put 5% down, the first-use and repeat-use difference disappears. That matters for veterans buying a second VA-financed home. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Other loan types follow their own schedule. The VA streamline refinance carries a 0.5% fee. A VA cash-out refinance carries 2.15% on first use and 3.3% after. Confirm current percentages on the VA.gov funding fee page before you commit.

Which Situation Are You In?

Start here. Find your row, then read the matching section.

How to Avoid It: The Exemption Route

You skip the fee entirely if you fall into an exempt group. The categories VA recognizes include:

• Veterans receiving VA compensation for a service-connected disability.
• Veterans entitled to that compensation but receiving retirement or active-duty pay instead.
• Surviving spouses receiving Dependency and Indemnity Compensation.
• Service members with a proposed or memorandum rating from a pre-discharge exam.
• Active-duty service members who provide evidence of a Purple Heart on or before the closing date.

The statutory basis is 38 U.S.C. § 3729(c). Confirm the current list on VA.gov, because it is the authority.

A few myths are worth killing. There is no waiver for low income. There is no waiver for first-time buyers. A Purple Heart does not make every veteran exempt in itself. And you do not need a 100% rating: a compensable service-connected rating is the test, though VA’s page is the final word on that.

Confirm Your Status Before Closing

The certificate of eligibility (COE) is the document from VA that shows your eligibility and fee status. Your loan officer pulls it. Do not assume it is right. Here is a short checklist:

1. Ask your loan officer to pull the COE early and read you the fee status. 2. Bring your VA benefits or award letter, plus any Purple Heart documentation. 3. If you are active duty with a pre-discharge claim pending, say so. The lender can submit VA Form 26-8937, Verification of VA Benefits, when the COE shows non-exempt. 4. Check the Loan Estimate and the Closing Disclosure for the funding fee line. An exempt borrower should see zero.

VA Circular 26-23-19 says lenders must not ignore information that could indicate an exemption. Still, you know your own file best. Speak up.

Pending Disability Claim: Pay, Delay, or Refund?

A pending claim does not exempt you. Generally you need a rating, or an exempt COE status, on the closing date. The pre-discharge proposed-rating case is the exception.

Here is the trap. Some buyers close, pay the fee, and plan to get it back later. VA’s circular tells lenders not to advise that. Refunds are decided case by case and cannot be guaranteed.

Honestly, the stronger play is often to confirm the rating decision’s timing first. Where your contract allows it, a short delay can cost less than a fee you chase for months. But a contract deadline, an earnest-money clause, or a seller who will not wait can all change that. This is a genuine toss-up that depends on your timeline.

If you do pay and are later found exempt, a refund may be possible when the award’s effective date falls on or before closing. A rating with a later effective date does not produce a refund. Verify the refund steps on VA.gov before relying on them.

How to Reduce It If You Are Not Exempt

Put More Down

The down payment is your biggest lever. Moving from under 5% down to 5% cuts the percentage meaningfully. Moving to 10% cuts it again. For a repeat-use borrower, the savings are bigger, since 5% down removes the 3.3% tier entirely. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

The tradeoff is cash. VA loans allow 100% financing with no mortgage insurance, so a down payment is a choice, not a requirement. Whether a lower fee is worth tying up cash is your call. A bigger down payment also shrinks the loan, which lowers the fee’s dollar base too.

Putting 20% down does not remove the fee. The lowest tier begins at 10%. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.

Ask the Seller to Pay It

The fee can be a seller concession, within VA’s concession limit. In a hot market, a seller may refuse. In a slower one, it is a fair ask. Write it into the offer rather than raising it at the closing table.

Choose the Right Refinance

If you already hold a VA loan and want to streamline it or switch from adjustable to fixed, the IRRRL carries the 0.5% fee. Down payment and equity do not lower it. Lendmire’s piece VA Cash-Out Funding Fee Rules for a Veteran With an Existing VA Loan covers the cash-out side in more detail.

Pay Cash or Finance It?

You can pay the fee at closing or roll it into the loan. Financing keeps cash in your pocket. It also raises your loan balance, so your payment rises and you pay interest on the fee for the life of the loan.

Paying cash avoids that. It costs you liquidity on closing day.

Here is the practical test:

• Tight on cash, strong income: financing often makes sense.
• Cash to spare, planning to stay long-term: paying cash saves the interest.
• Ratio-sensitive file: a financed fee adds to the loan size, which can matter for debt-to-income and residual income.

Residual income is the money left each month after major obligations, and it is the controlling test on VA loans. The 41% debt-to-income figure is a guideline, not a cap. A higher ratio needs residual income well above the table.

Stacking the Levers

You can combine moves. Picture a buyer using the VA benefit for the second time. With under 5% down, that buyer faces the 3.3% tier. Raise the down payment to 5%, and the fee drops to 1.5%. Ask the seller to cover part of it, and cash to close drops again. Finance the rest if cash is tight. Each step trades something: cash, negotiation leverage, or loan size. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.

Run the numbers on your own purchase price with your loan officer. The tiers above are percentages, and the dollar result depends entirely on your loan amount.

Where the General Rule Breaks

A few edge cases change the answer:

• IRRRL. Down payment does not reduce the fee. The exemption still applies if you qualify. No COE is required for an IRRRL, per Circular 26-23-19.
• Repeat use. The fee is higher for subsequent use with a small down payment, but 5% down erases the gap.
• Assumed loans. The fee on an assumed VA loan is 0.5% unless the assuming veteran is exempt.
• Native American Direct Loan. It has its own fee schedule, so ask for it specifically.
• Occupancy. VA loans are for homes you live in. The fee applies to owner-occupied purchases and refinances. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.

Lendmire’s piece VA Loan vs Conventional Loan for a Veteran: Funding Fee or PMI helps if you are weighing the fee against private mortgage insurance.

Key Terms Defined

Funding fee: A one-time charge VA sets on most VA loans, collected by the lender and passed to VA.

Certificate of Eligibility (COE): The VA document that confirms your eligibility and shows your funding fee status.

IRRRL: The Interest Rate Reduction Refinance Loan, VA’s streamlined refinance for an existing VA loan.

Seller concession: A closing cost the seller agrees to pay on your behalf, limited by VA.

Residual income: The money left each month after major obligations, which VA uses as its controlling affordability test.

Subsequent use: Using your VA loan benefit again after a prior VA-backed loan.

What to Do Next

Pull your COE early. Gather your award letter. Decide how much cash you want to put down. Then ask for the Loan Estimate and read the funding fee line closely.

The VA loan programs arranged through Lendmire’s wholesale lenders offer 100% financing with no mortgage insurance, and the wholesale programs it places with start at a 580 decision score, subject to lender guidelines and full file review. If you are buying a home and want to see whether a VA loan fits your situation, Lendmire can help you compare the options and what each one asks of the file.

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

About Lendmire

Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. VA Lenders Handbook (Pamphlet 26-7), Chapter 8

2. VA.gov, Funding Fee and Closing Costs

3. VA Circular 26-23-19, Funding Fee Exemption and Refund Procedures