While VA loans don't require you to make a down payment or pay for mortgage insurance, they do require borrowers to pay a funding fee. The VA funding fee can range from 2.3% to 3.6% of a home's sale price for first-time use. However, not all borrowers have to pay it. There are a variety of exemptions, and in some cases, you'll need to pay it but can get a VA funding fee refund afterward. Think you should get a refund?
Read on to learn all you need to know about the VA funding fee refund process.
The VA makes the final determination about any funding fee exemption. Typically, the Certificate of Eligibility (COE) includes information about a borrower’s exemption status.
Funding fee exemptions include:
Most of the time, funding fee exemptions are fairly straightforward. But there can be situations that are less clear-cut. One of the more common is Veterans with disability claims pending at the time of their loan closing.
Generally, Veterans with pre-discharge claims pending will need a proposed or memorandum rating in the loan file in order to be eligible for a funding fee refund.
Now you may be wondering why you had to pay the funding fee if you are otherwise exempt. This can happen if you're a Veteran and your exempt status can't be verified before your loan closes, you must pay the funding fee as if you were not exempt. This may include situations where your disability claim is still in pending status at the time of closing.
However, your closing package should state that you do claim exempt status. The VA will then evaluate your situation to determine if you should get a funding fee refund. Additionally, if you find out after the fact that your disability claim is approved and you are entitled to retroactive compensation that begins before your loan closed, you may be able to obtain a refund.
The VA funding fee refund will ultimately come from the Department of Veterans Affairs. But you’ll typically start with your mortgage lender or servicer. You can also reach out directly to the VA at 877-827-3702.
You can expect to receive your money back within 10 business days after you've gotten a response about your VA funding fee refund.
The VA refunds the money directly to the Veteran. Lenders are not required to reduce the loan balance by funding fee amount financed into the loan.
Once your VA funding fee refund has been approved, the way you'll receive it depends on how you paid for it when your loan closed. If you paid the fee in cash, you will receive a cash refund. If you paid for it out of your loan proceeds, then your lender will need to refund the amount to your loan balance and submit evidence to the VA that the refund was applied.
If you are approved for a VA funding fee refund post-closing and didn't write off the funding fee on your taxes, it shouldn't qualify as taxable income. However, if you did deduct the funding fee refund from your taxes, you would need to count the money you received from the refund as income. By writing off the funding fee refund, you reduce your overall taxable income.
At the end of the day, if you are exempt from paying the VA funding fee and were required to do so, there is nothing to worry about. Just be patient, as both the VA and VA lenders want to ensure you get your money refunded.