VA Loan Funding Fee Exemption Documentation for a Disability Rating

The Quick Read: The papers that prove your exemption start with your Certificate of Eligibility (COE), the VA document that shows your funding fee status. If the COE reads “Exempt,” your exemption is already documented on the COE. If it reads anything else but you receive VA disability compensation, your lender uses backup proof, usually a VA benefits verification form. Either way, your status has to be verified before closing.

What Is the Funding Fee, and Why Does an Exemption Matter?

The funding fee is a one-time charge on a VA-backed loan. VA explains that it offsets taxpayer cost, because the program has no down payment requirement and no monthly mortgage insurance. It applies to buying, building, improving, repairing, or refinancing. It is based on the loan amount, not the purchase price.

For a purchase, the fee depends on whether you have used the benefit before and how much you put down. Across the wholesale programs Lendmire works with, a first-time user with less than five percent down sees 2.15%. That drops to 1.5% with five to under ten percent down and 1.25% with ten percent or more. A repeat user with less than five percent down sees 3.3%, with the same 1.5% and 1.25% tiers above that. These figures are subject to lender guidelines and full file review.

The fee is the biggest VA-specific cost on the loan. A veteran who is not exempt either pays it in cash at closing or finances it into the loan, which raises the balance. An exempt veteran pays nothing. That is why the paperwork matters. A missing document can turn a zero-dollar line into a real one.

If you are weighing the program overall, Lendmire’s VA loan programs page covers the basics: 100% financing on a purchase, no mortgage insurance, and residual income as the controlling underwriting test.

Who Qualifies for the Exemption?

The exemption follows VA compensation, not a particular rating number. The fee applies unless you meet certain requirements, and one of them is receiving VA compensation for a service-connected disability.

The VA Lenders Handbook lists the exempt groups:

• Veterans receiving VA compensation for a service-connected disability.
• Veterans rated by VA as eligible for compensation after a pre-discharge exam or a pre-discharge records review that produces a memorandum rating.
• Veterans entitled to compensation who are not receiving it because they are on active duty.
• Surviving spouses of Veterans who died in service or from a service-connected disability.

Notice what is missing: a percentage. You will see lender websites claim you need a 10% rating. The VA sources reviewed do not say that. They turn on receiving, or being entitled to, compensation. Your COE settles the question, so read it rather than guessing from a rating.

What Does the COE Show, and What Do Lenders Check?

The COE has a funding fee status field. In practice it reads Exempt, Non-Exempt, or a note to contact the VA regional loan center. The Handbook gives the lender one job here: verify the status of any Veteran who may be exempt.

Think of it as three paths.

Exempt. The funding fee does not apply in this case. You do not need a separate rating letter for the fee. Your lender should show a zero on the fee line, and you can confirm that on your Loan Estimate and Closing Disclosure.

Non-Exempt, but you receive compensation. This is the mismatch case. VA’s records may lag a recent award, or something was entered wrong. Your lender needs backup proof, covered below.

Contact the regional loan center. Treat it like the mismatch case. Tell your loan officer right away so the file does not sit.

Apply for the COE early, before you are under contract. It is much easier to fix a wrong status at the start than in the last stretch of a file.

Which Documents Prove Your Exemption?

Here is the documentation by situation, drawn from the Handbook’s section on verifying exempt status.

VA Form 26-8937

This is the fallback the Handbook names. It must be properly completed and signed, and it must show exempt status. Your lender submits it for you. VA Circular 26-23-19 says that if the COE shows Non-Exempt for an active-duty borrower with a pending claim, the lender should submit this form. The circular also covers how the form gets uploaded, which is a lender task, not yours.

Your VA award letter

Gather it early. It shows your rating and that you receive compensation. It is the document most borrowers already have in a drawer. It supports your file and helps resolve a mismatch, but it does not always replace the COE or the verification form. Give it to your loan officer and let the lender decide what VA requires.

Share only what the lender asks for. Proof of status and compensation is the point. You do not need to hand over your full medical or claims file.

The retirement-pay case

Some veterans choose military retirement pay over VA compensation. They are still exempt if they are entitled to compensation. The Handbook asks for a copy of the original VA disability rating notification plus documentation of the retirement income. Retirement pay by itself does not make you exempt. The entitlement does.

Other documents to keep handy

Your DD-214, if it is not already on file with the COE request. That is the standard ask for proving service.

Your Timeline, Step by Step

The order of operations matters more than any single paper.

1. Before you shop. Request your COE and read the funding fee status field. Pull your award letter.

2. At pre-approval. Tell your loan officer you receive compensation. Hand over the COE and award letter. If the status is wrong, this is the time to start fixing it.

3. Under contract. Your lender confirms your status. If the COE does not show Exempt, the lender submits Form 26-8937.

4. In underwriting. Make sure the file holds proof of exempt status. The exemption changes the fee only. It does not touch the VA appraisal or minimum property requirements, and it does not reduce other closing costs.

5. Before closing. Check the Loan Estimate and Closing Disclosure for a funding fee line. It should show zero. Raise any error before you sign.

The deadline is firm. If exempt status cannot be verified before closing, the fee must be remitted as if the borrower were not exempt.

What If the COE Is Wrong?

Troubleshooting is mostly a matter of speed and a clear ask.

Your COE says Non-Exempt but you receive compensation. Give your lender the award letter and ask them to submit VA Form 26-8937. Say it plainly: “My compensation should make me exempt. Please verify my status with VA before closing.”

You were awarded recently. VA’s system may not show it yet. The form route exists for this reason. If it does not resolve, contact the VA regional loan center to correct the record.

Your lender seems unsure. The Handbook assigns lenders the verification role, so it is a normal request. Ask your loan officer to confirm the steps in writing, and keep your own copies of everything.

The fee shows on your disclosure. Do not wait for the final documents. Flag it at once so the lender can correct the file before closing.

Pending Claims and Late Ratings

This is where the rule breaks, and it is the one that costs real money.

If your rating is not on VA’s record before closing, you are not exempt at closing. For an active-duty member with a pre-discharge claim, VA’s circular says that closing without a proposed or memorandum rating means no exemption and no VA refund. The same rule appears in VA Circular 26-22-12.

A common myth says you can close, then get the fee back later. Do not plan around that. The lender must collect the fee when exemption cannot be verified. A refund may be possible in some post-closing cases, but it is not something to build a closing plan on.

If compensation is awarded after closing, refunds and corrections run through VA’s Funding Fee Payment System, as Circular 26-23-19 explains. Where the fee was paid in error, the refund can go back to the lender. Otherwise it reduces the loan principal or goes to the Veteran. Whether you get a refund can depend on the effective date of your award compared with your closing date. For your specific situation, check with VA at VA.gov and ask your loan officer.

If your rating decision is close, talk to your loan officer before you set a closing date. Sometimes the cleaner path is to wait for the rating to post. Sometimes it is not. That is a decision to make with real numbers in front of you, not a guess.

Three Scenarios in Plain Words

The recent award. A veteran is awarded compensation a few weeks before going under contract. The COE still shows Non-Exempt because the record has not caught up. The veteran gives the lender the award letter on day one. The lender submits Form 26-8937, and the status updates.

The retirement-pay veteran. A retired service member takes retirement pay instead of compensation but holds a VA disability rating. The file needs the original rating notification and the retirement income documentation. With those, the exemption applies.

The late rating. A buyer expects an approval but the decision has not posted by closing. The lender cannot verify exempt status, so the fee is collected. Any refund later depends on the facts and on VA’s process. The buyer did what most people do: assumed an expected rating would count. It does not. Status on the record at closing is what counts.

What the Exemption Does Not Remove

The exemption wipes out the funding fee. That is all. Appraisal, title, recording, prepaid items, and escrow costs remain. On a purchase, those are paid at closing, by the seller, or through lender credits, subject to lender guidelines.

To see the size of the fee itself, use VA’s own example. A first-time buyer purchases a $200,000 home with 5% down. The fee is 1.5% of the $190,000 loan, or $2,850. An exempt borrower in that same case pays zero. Run your own numbers against VA’s funding fee chart, which is the current source of record. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.

The fee applies to refinances too, and so does the exemption. If you later refinance, your status still matters.

Key Terms Defined

Certificate of Eligibility (COE): The VA document that confirms you qualify for the benefit and shows your funding fee status.

Funding fee: A one-time VA charge on the loan that stands in for a down payment requirement and monthly mortgage insurance.

VA Form 26-8937: The Verification of VA Benefits form that a lender submits to confirm exempt status.

Memorandum rating: A rating issued after a pre-discharge exam or records review that can establish exemption before separation.

Regional loan center: The VA office that handles loan eligibility questions and record corrections.

Funding Fee Payment System (FFPS): The VA system through which fee refunds and corrections are started.

Common Mistakes

• Assuming you need a certain rating percentage. The VA sources reviewed set none.
• Waiting for the lender to find the problem. Check your COE first.
• Counting on a refund after closing.
• Thinking retirement pay alone makes you exempt.
• Skipping the review of the Loan Estimate and Closing Disclosure.
• Believing a lender can waive the fee. Only VA determines exemption.

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. Bring your COE and award letter and ask your loan officer to confirm your funding fee status before you go under contract.

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

About Lendmire

Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. VA.gov: VA funding fee and loan closing costs

2. VA Lenders Handbook (VAP 26-7), Ch. 8 (VA knowledge base)

3. VA Circular 26-23-19

4. VA Circular 26-22-12