VA Loan Fee and Mortgage Insurance Rules With a Disability Rating

The Quick Read: A VA loan never carries monthly mortgage insurance, and a veteran receiving compensation for a service-connected disability does not pay the upfront funding fee. Most other borrowers pay that one-time fee, and it can be rolled into the loan. VA says the test is whether you receive compensation, not which rating percentage you hold. Timing matters, because the exemption has to be confirmed before closing.

Does a VA Loan Have Mortgage Insurance?

No. The VA guarantee takes the place of mortgage insurance. The CFPB confirms there is no monthly mortgage insurance premium on a VA-backed loan.

Here is how that plays out on a purchase. Across the wholesale programs Lendmire places VA loans with, a buyer with full entitlement can finance 100% of the price, as long as the price is not above the appraised value. There is no down payment requirement. There is no mortgage insurance of any kind. There is no VA loan limit on full entitlement. If you have only remaining entitlement, a down payment may be required, so speak with a loan officer about your situation.

Compare that with other loan types, where monthly insurance can sit on the payment for years. On a VA loan, that line item simply does not exist. (Many first-time VA buyers expect it to show up at the closing table anyway.)

“No mortgage insurance” does not mean “no upfront cost,” though. That is what the funding fee is for.

What Is the VA Funding Fee?

The funding fee is a one-time charge paid by the veteran, service member or survivor. VA uses it to lower the program’s cost to taxpayers, since the loans need no down payment and no monthly insurance.

The fee is a percentage of the loan amount, not the purchase price. VA’s own example: a first-use buyer puts 5% down on a $200,000 home. The fee is 1.5% of the $190,000 loan, which is $2,850. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

For a purchase, the fee depends on your use of the benefit and your down payment:

Those are the purchase tiers in VA News’ funding fee explainer. Refinances run differently, and the refinance section below covers them. All figures are subject to lender guidelines and full file review.

If the fee applies to you, you can pay it in cash at closing or finance it into the loan. Financing it raises your balance and your monthly payment. That is the real cost of the fee for many buyers.

Who Is Exempt Because of a Disability Rating?

You are exempt if you receive VA compensation for a service-connected disability. VA lists this as one of the conditions that waives the fee on a purchase, build, improvement, repair or refinance.

The exemption list is wider than the headline. Check the live VA funding fee page for the full, current version. In plain terms, it covers:

• Veterans receiving compensation for a service-connected disability.
• Veterans entitled to compensation who receive retirement or active-duty pay instead.
• Surviving spouses receiving Dependency and Indemnity Compensation (DIC).
• Service members with a proposed or memorandum rating from a pre-discharge claim.
• Active-duty Purple Heart recipients who provide evidence on or before closing.

Does the Rating Percentage Matter?

No. The VA test is whether you receive compensation. It is not “10% or higher” or any other threshold. Compensation generally starts at a 10% rating, which is why some sources use that number as shorthand. A 30% rating and a 100% rating are treated the same for the funding fee.

What About Retirement Pay?

A veteran who is entitled to compensation but takes retirement pay instead can still be exempt. This one needs paperwork: usually the original rating notification plus documentation of the retirement income. Your lender will tell you what the file needs.

What About Purple Heart?

That is a separate exemption. It covers active-duty recipients and does not require a disability rating.

How Do You Claim the Exemption?

Your Certificate of Eligibility (COE) is where exempt status usually shows. Here is the workflow most files follow:

1. Get your COE. VA’s COE decides eligibility. Check whether it shows the exemption.

2. Gather proof. That is typically your VA award letter. A VA Form 26-8937 (Verification of VA Benefits) can also confirm status.

3. Tell your loan officer up front. Do not wait for the lender to find it.

4. Check the Loan Estimate. The funding fee line should read zero if your exemption is confirmed.

5. Check the Closing Disclosure. Make sure the zero carried through.

The lender collects the fee from every non-exempt borrower at closing and sends it to VA. If your status is confirmed, that step never happens.

If the COE does not show your exemption, fix it before you close. Chasing a refund afterward is slower and less certain than catching the error at the front.

What If Your Claim Is Pending at Closing?

If the lender cannot confirm your status before closing, the fee is collected. That is the part that surprises people.

You may still get money back. VA’s loan fee page says you may be entitled to a refund if a compensation claim was pending at closing and you were later awarded compensation. The effective date of the award must be retroactive to a date before closing.

Two cautions. The refund is not automatic, so you have to start it. VA directs borrowers to contact their mortgage holder or the VA Regional Loan Center. That page is also older, so confirm the current process and contact details on va.gov.

Here is how the timing plays out:

The pre-discharge row deserves a closer look. An exemption for a service member needs a proposed or memorandum rating issued before closing. If you close before discharge without one, expect to pay the fee.

How Do Refinances Change the Fee?

The exemption applies to purchase, cash-out and streamline refinances alike. The dollar value of the exemption differs a lot by loan type, because the fee schedules differ.

• IRRRL (streamline): 0.5%. This refinances an existing VA loan to a lower rate or from adjustable to fixed, with no VA appraisal. It needs a net tangible benefit and seasoning of the later of 210 days from the first payment and the 6th payment.
• Cash-out refinance: 2.15% first use, 3.3% after. It reaches 100% of the appraised value including the financed fee, and it can refinance any loan type into VA.

The VA circular states that the reduced down-payment rates do not apply to refinance loans, and that the published rates apply to loans closing before November 14, 2031.

Cash-out is the highest fee tier for a non-exempt borrower. So the exemption saves the most there. For more on that, see Lendmire’s piece on the VA cash-out funding fee exemption rules for a pending disability rating.

How Does Disability Income Affect Qualifying?

Your compensation counts as income, and it is often tax-free. That matters in two different tests, and they behave differently.

Debt-to-income (DTI). The VA Lenders Handbook says tax-free income may be grossed up for the DTI ratio only. The lender must first verify the income is actually non-taxable. The handbook then uses 125 percent of the non-taxable amount. Per the VA Handbook credit underwriting chapter, the gross-up is noted on the loan analysis form. Your actual income is not changed on the income line.

Residual income. This is the controlling test on a VA loan. It measures what is left each month after debts, obligations and housing costs, to cover family living expenses. It uses your actual income, not the grossed-up figure.

The practical takeaway: the 41% DTI figure is a guideline, not a cap. A ratio above it needs residual income well above the table. The gross-up helps your DTI. It does not pad your residual income. Household size counts everyone in the household, including a non-purchasing spouse and dependent parents.

For more on how rating income is documented, see Lendmire’s article VA Cash-Out Income Rules for a Veteran With a Disability Rating.

What the Exemption Does Not Remove

Exempt does not mean free. The exemption covers the funding fee only. You still face the usual appraisal, title and other closing costs, plus homeowners insurance. The rating affects the fee and the income analysis, not the appraisal.

Many buyers use “mortgage insurance” and “required insurance” interchangeably. They are different. Homeowners insurance is a separate requirement on any mortgage, and VA loans are no exception.

The exemption also has a payment effect: VA loans do not carry monthly mortgage insurance, so there is no mortgage insurance line on the payment. Homeowners insurance still applies as a separate requirement.

Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.

Key Terms Defined

Funding fee: A one-time charge on most VA loans that replaces monthly mortgage insurance. It is a percentage of the loan amount.

Certificate of Eligibility (COE): The VA document that confirms you qualify for the benefit. Exempt status usually shows here.

Residual income: The money left each month after debts, obligations and housing costs. On a VA loan, it is the controlling test.

Gross-up: A lender adjustment that counts non-taxable income at 125 percent when calculating debt-to-income. It does not apply to residual income.

IRRRL: Interest Rate Reduction Refinance Loan, a streamlined VA-to-VA refinance.

Next Step

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. Explore Lendmire’s VA loan programs or call 828-256-2183. Program details are subject to lender guidelines and full file review, and nothing here is a commitment to lend.

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

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. VA – VA funding fee and loan closing costs

2. CFPB – What is mortgage insurance?

3. VA News – VA funding fee: Who pays and who is exempt

4. VA – Loan Fees (funding fee refunds)

5. VA Circular 26-23-06 Exhibit B

6. VA Handbook credit underwriting chapter