VA Loan Refinance: When Is the Funding Fee Refundable?
If you’re thinking of taking advantage of a Veterans Administration (VA) loan to refinance your home, you may be curious about the VA funding fee. Specifically, you might have questions about the VA funding fee exemption or the VA loan funding fee refund process.
Before we dive into those issues, it’s helpful to have some background on what VA loans are and why they require a funding fee. This way, you’ll understand more about the funding fee, along with the situations that warrant a refund of the VA loan funding fee or an exemption from it altogether.
- VA loan overview
- What is the VA loan funding fee?
- How much is the VA loan funding fee?
- Getting a VA funding fee exemption
- How to get a refund on the VA funding fee
VA loan overiew
A VA loan is a mortgage loan offered to qualifying military personnel, servicemembers, veterans, and eligible surviving spouses by private lenders, and guaranteed by the U.S. Department of Veteran Affairs, in an effort to help qualifying individuals receive favorable terms on a home loan and become homeowners.
What is the VA loan funding fee?
VA loans are very attractive for a number a reasons. For one, this loan allows banks to lend at 100% loan-to-value (LTV) for both home purchase and home refinance loans on a property.
Because the loan is guaranteed by the Veterans Administration, there is no private mortgage insurance (PMI) requirement. With many home loans, PMI is required until the principal balance of the mortgage reaches 80 percent of the original value of the home. PMI can add a sizeable amount of money to your mortgage payment each month.
The VA loan funding fee is a version of PMI specific to VA loans. It is a way to cover the risk and administrative costs of guaranteeing these loans in case a borrower defaults. In order to make 100% LTV home loans for both new purchases and refinances, this loan funding fee is assessed to borrowers at the time of their home purchase or refinance.
How much is the VA loan funding fee?
The VA loan refinance funding fee is based on a number of factors, including whether or not you are using a VA loan for the first time, the service category you belong to and even the type of loan you are getting.
For example, the funding fee on a cash-out refinance loan is different from an Interest Rate Reduction Refinancing Loan (IRRRL). You’ll also notice that a reservist or national guard service member will have a different funding fee from a borrower who is considered “Regular Military.”
The Veterans Administration has a funding fee table to help eligible VA loan applicants understand how much they or their surviving spouse will have to pay in terms of a funding fee.
Here is the funding fee table for cash-out refinancing loans:
|VA Cash-out Refi Funding Fee Table|
|Type of veteran||Funding fee for first-time use||Funding fee for subsequent use|
Also, it’s important to know that although the funding fee is typically rolled into the loan, eligible borrowers still must cover closing costs if there are not enough seller credits to cover them.
For example, if an eligible borrower were to purchase or refinance a home in the amount of $100,000 for the first time as an active duty service member, the total loan amount would be $100,000 plus the funding fee of 2.15%, or $102,150.
Getting a VA funding fee exemption
Not all VA borrowers have to pay the funding fee; the Veterans Administration has guidelines on who is exempt from paying this fee.
- veterans receiving VA compensation for a service-connected disability
- veterans who would be entitled to receive compensation for a service-connected disability if they did not receive retirement or active duty pay
- surviving spouses of veterans who died in service or from a service-connected disability
In some cases, eligible borrowers may be able to get the funding fee refunded after they’ve already closed on their loan.
For example, a situation where an active duty service member knew that his disability rating would make him eligible for the funding fee exemption after separation from service. However, he closed on the home loan before his disability compensation began.
Once his disability rating was determined, and the effective date of the disability status was before the actual closing date, it was deemed that he was exempt from the funding fee. He applied for a refund of the funding fee and it was granted.
This refund saved him $54,000 and four years on his amortization table, along with half of a percentage point on his interest rate.
Because most borrowers pay the funding fee as a cost added to their loan, the refund is paid back to their lender and, thus, reduces the principal balance on the loan.
There are other scenarios where a refund may be in order. Though less common, it’s possible that the funding fee could be miscalculated.
A borrower could think they are eligible for a refinance loan under the VA program under one service category, but find out later he’s eligible under another.
An example would be a borrower who pays the funding fee as a reservist but should have paid the lower rate of an active military service member.
How to get a refund on the VA funding fee
In a nutshell, the only two scenarios under which a borrower can get the funding fee refunded are when:
- the veteran is found to be exempt from paying the funding fee and the effective date of the exempt status precedes the closing of the loan
- the funding fee was incorrectly calculated
What if you have a disability claim pending?
Some borrowers seeking VA-guaranteed loans may begin their loan application while they have a disability claim pending. In this case, lenders will proceed with the loan process as if the borrower were not exempt from the funding fee.
After closing, borrowers’ disability claim can be approved, making them eligible for an exemption of the funding fee. So long as the effective date of eligibility is before the date the loan closed, the veteran can have the fee refunded.
Though there is a provision for a refund of the loan funding fee, borrowers who are unsure of how their pending disability claim will affect their exemption status should contact a VA Regional Loan Center for more clarification on their disability claim status and to learn about the process for requesting refunds.
Borrowers who believe they are eligible for a refund must initiate this refund process with their VA Regional Loan Center. The VA Regional Loan Center will work with the borrower to get their Certificate of Eligibility (COE) updated according to their disability rating.
However, borrowers can also contact their lender to initiate the refund as an alternate course of action.
Going through the bank that funded the loan can be the easiest recourse to get a refund. They are the ones that sent the funding fee to the VA, so they are also the ones that would return the funding fee money as a principal reduction to the borrower’s loan.
Once the COE has been updated with the proper disability rating, the COE and refund request will be submitted by the veteran’s lender to the VA for processing. When all paperwork is approved and verified by the VA, the lender will either issue a check to the borrower or apply a reduction in principal equal to the funding fee.
When the refund request is received, the lender has to remit the VA funding fee within 15 calendar days of loan closing. Lenders who pay the fee more than 15 days after loan closing will automatically be assessed a 4% late fee. If the fee is paid more than 30 days late, an late fee and an interest charge will automatically be assessed.
If the veteran has paid the funding fee in cash, it will be refunded as cash back to the veteran. However, if the funding fee was paid with the loan proceeds, it would be returned to the lender (or current loan servicer if the loan has been sold) and applied to the outstanding principal of the loan.
Navigating the VA loan process
VA loans can be beneficial for those looking to purchase or refinance a home at 100% LTV. Though the process of determining eligibility and funding fee exemptions can seem overwhelming, it’s worth exploring options and scenarios that can give you the best financial outcome possible — including a refund of the funding fee.
There are many resources available to help you navigate the process — including many lenders, nationwide, that have vast experience with VA loans. You can also contact your VA Regional Loan Center for information and clarification for guidelines on VA home purchase and refinance loans.