Closing costs can turn the dream of home ownership into a nightmare on the very day you’re expecting to celebrate. Finding out the largest purchase of your life has a bunch of added, often unexpected, costs at the last minute can be pretty traumatic.
Among the great benefits of a mortgage backed by the Department of Veterans Affairs is the avoidance of that trauma. A VA home loan comes with no closing costs, no required down payment and no monthly mortgage insurance payment. To qualify for a VA loan, you must be:
- A veteran who served roughly 90 to 181 consecutive days
- An active-duty service member who has served a minimum of 90 consecutive days
- A National Guard or reserve member
- Someone discharged because of hardship or certain medical conditions
- The surviving spouse of a veteran
- The spouse of a POW or a veteran missing in action.
However, a VA loan does come with a funding fee, a different but significant sum paid at closing.
What Is a VA Funding Fee?
Help with buying a home in the military makes perfect sense. The men and women who sacrifice to protect America deserve a fair shot at the American dream. It can be harder for them to save up the way a civilian can (although that is certainly not easy). Eliminating obstacles, like not requiring a down payment or closing costs with VA home loans helps to level the playing field for those who serve.
A civilian purchasing a $300,000 home would need between $15,000 and $30,000 to cover a down payment plus closing costs: 3 percent down and 2 to 6 percent in closing costs. With a VA loan, no down payment or closing costs are needed, only the VA funding fee. But the funding fee is partly determined by how much of a down payment you choose to make.
So, if you put 5 percent down, your VA funding fee would be 1.5 percent of the loan, or $4,275. Combined, that’s close to $20,000, slightly less than the upfront costs for a civilian.
It helps to think of a VA funding fee as a one-time contribution to the VA loan program that benefits future applicants for home mortgages. Indeed, your new VA loan is partly possible because of funding fees paid by previous applicants. The idea is to keep the program running while reducing the cost to taxpayers.
You may be able to fold the VA funding fee into your loan, reducing the upfront cost. There is also the possibility of getting a refund of your VA funding fee.
2023 VA Funding Fee Chart
| Down Payment | First-Time VA Loan Use | Subsequent VA Loan Use |
|---|---|---|
| None | 2.15% | 3.3% |
| 5% or more | 1.5% | 1.5% |
| 10% or more | 1.25% | 1.25% |
VA Funding Fee Refunds: Who Is Eligible?
You may qualify for a refund of the standard VA funding fee. The VA understands that circumstances may be different for many veterans. The VA funding fee can be waived for eligible service members, veterans or surviving spouses who have a VA-certified disability related to their military service.
A refund of the funding fee may be available to:
- Veterans who are compensated for service-connected disabilities
- Veterans who would get disability compensation if they didn’t get retirement pay
- Veterans rated as eligible to receive compensation based on a pre-discharge exam or review
- Purple Heart recipients
- Eligible surviving spouses
If a disability claim has not been approved at the time of receiving a VA loan, that status can be noted on the application. Once the disability is confirmed, the refund can be paid.
Can the VA Funding Fee Be Waived?
Refunding the VA funding fee is helpful, but it is simpler to waive the fee entirely. This can be done if the veteran or service member meets the exemptions listed above, with approval from the VA. Waiving the fee can reduce costs paid by a qualifying veteran or spouse at closing.
If the exemptions are not met or confirmed at the time of the home purchase, the veteran may have to pay the funding fee. Once the exemptions are confirmed, the buyer will receive a refund of the fee.
The VA offers other solutions and opportunities for military housing that may be better for individual veterans or service members.
How Does Receiving Your VA Funding Fee Refund Work?
If you are a military service member or veteran seeking a refund of your VA funding fee, you will not be shocked to learn there are forms involved.
Form 26-8937 is filled out by your lender to confirm any disability payments you receive. You may also need to provide your VA claim folder number and service number. You’ll then certify that you’re receiving those benefits, and the form is sent to the VA for verification.
Once your VA funding fee refund has been approved, the manner in which you receive it will depend on how you paid for it when your loan closed. If you paid the fee in cash, you will receive your refund in cash. If the fee was folded into your loan, your lender must refund that amount to your loan balance, then submit proof to the VA that the refund was applied.
How Long Does It Take to Get Your VA Funding Fee Refund?
From the day the VA informs you that your refund has been approved, you can expect to wait up to 10 business days to receive the refund.
VA Funding Fee Refund Tax Implications
As usual with tax issues, there is not a simple, direct answer other than, “It depends.”
It depends, mostly, on how you handled your VA funding fee. If you didn’t deduct your funding fee from your taxes, the refund should not count as taxable income. So you would not owe taxes on the refund. If you did write off the funding fee from your taxes, the refund would count as taxable income.
There are other tax breaks for disabled veterans that could help reduce your tax burden. It is always a good idea to know what is available to you.
Overall, VA Home Loans Are Beneficial With or Without a Funding Fee Refund
The VA has been around since late in the 19th century, but its scope and many of its programs have roots in the G.I. Bill, enacted in 1944. The idea was to welcome back the Greatest Generation veterans of World War II with educational benefits and other opportunities to put them on solid footing after their years of sacrifice.
Almost 80 years later, the U.S. still maintains a large military presence that requires the participation of millions of people. And the country still owes those people a decent welcome back into civilian life.
That’s one of the primary benefits of VA home loans. The funding fee is part of the process, but there are still benefits even if you don’t receive a refund. VA loans include no down payment, none of the other closing costs typical for civilians, and no mortgage insurance. There is no insurance as powerful as a guarantee from the United States government.
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