VA Funding Fee Exemptions

The VA funding fee is a statutory requirement mandated by law to help defray the costs of the loan guaranty program. There are no provisions in the regulations that allow for a waiver of the fee based on financial hardship, low income, or lack of assets. The exemptions are strictly defined by law and limited to Veterans with service-connected disabilities, those entitled to such compensation, and eligible surviving spouses. If a borrower does not fall into one of these specific legal categories, the fee must be paid or financed.

If your Certificate of Eligibility indicates “Non-Exempt” or “Contact RLC,” but you believe you are exempt due to a disability rating, you must provide documentation to your lender immediately. The lender cannot unilaterally waive the fee. They must submit VA Form 26-8937 along with your proof of rating to the VA Regional Loan Center. The VA will review the records and return the form indicating the correct status. If this verification cannot be completed before closing, the lender must collect the fee, and you can pursue a refund later.

A memorandum rating is a decision issued by the VA before a service member is officially discharged. If a service member undergoes a pre-discharge exam and receives a memorandum rating indicating they are eligible to receive compensation, they are treated as exempt from the funding fee at closing. This allows service members who are transitioning to civilian life to utilize their home loan benefit without paying the fee, provided this rating is established and verified by the lender before the date of loan closing.

Receipt of military retirement pay alone does not trigger an exemption. However, you are exempt if you are receiving retirement pay in lieu of VA disability compensation. This means that if you have a service-connected disability rating but have chosen to receive your full retirement pay instead of the disability compensation (often to avoid an offset), you are still considered exempt from the funding fee. Lenders verify this by obtaining a copy of the original VA notification of disability rating and documentation of your service retirement income.

Surviving spouses are exempt from the VA funding fee if they meet specific criteria. To qualify, the borrower must be the surviving spouse of a Veteran who died in service or died from a service-connected disability. This exemption applies whether the surviving spouse is using the deceased Veteran’s entitlement or has their own entitlement as a Veteran. Lenders verify this status through the Certificate of Eligibility (COE) or by submitting a Verification of VA Benefits form. If the COE confirms eligibility as a surviving spouse under these conditions, no funding fee is charged.

The method of refund depends on how you originally paid the funding fee. If you paid the fee in cash at the closing table, you are entitled to a cash refund if you are later found to be exempt. However, if you financed the funding fee into your loan amount—which is the most common method—you will not receive a cash check. Instead, the lender must apply the refund amount as a principal reduction against your outstanding loan balance. This reduces your total debt but typically does not lower your monthly payment.

If your claim for service-connected disability compensation is pending and has not been adjudicated by the time of your loan closing, the lender is required to collect the funding fee. The lender cannot assume the claim will be approved. The fee must be remitted as if you were non-exempt. However, if you are later awarded disability compensation and the effective date of that award is determined to be retroactive to a date prior to your loan closing, you may then apply for a refund of the fee you paid.

Being on active duty does not automatically exempt you from the VA funding fee. However, you may be exempt if you have completed a pre-discharge examination or review that rates you eligible to receive compensation. If you are entitled to receive compensation but are not presently in receipt of it solely because you are on active duty, you qualify for the exemption. Without this specific rating or entitlement established prior to closing, active duty service members are generally subject to the standard funding fee rates applicable to their loan type.

Lenders are required to verify a borrower’s exempt status before closing. The primary method is checking the Certificate of Eligibility (COE). In many cases, the COE will explicitly state “Exempt” and may even list the monthly disability amount. If the COE indicates “Contact RLC” or if the borrower claims an exemption that is not reflected on the COE (such as a Veteran receiving retirement pay in lieu of disability), the lender must submit VA Form 26-8937, Verification of VA Benefits, to the appropriate Regional Loan Center to confirm the status.

According to VA regulations, specific groups of borrowers are legally exempt from the funding fee. This includes Veterans who are currently receiving VA compensation for a service-connected disability. Additionally, Veterans who would be entitled to receive such compensation if they were not receiving military retirement pay are also exempt. The exemption extends to surviving spouses of Veterans who died in service or died from a service-connected disability. Finally, active duty service members who have been rated eligible for compensation as a result of a pre-discharge examination or review are not required to pay the fee.