How to Avoid the VA Funding Fee: Waiver Categories and Refunds

You can avoid the VA funding fee entirely if you fall into one of five categories set out in federal law: veterans receiving service-connected disability compensation, veterans entitled to that compensation but drawing retirement or active-duty pay instead, active-duty Purple Heart recipients, qualifying surviving spouses, and active-duty members with a proposed or memorandum disability rating issued before closing. There is no separate application. Once your exemption is confirmed in the loan file, the fee — which would otherwise run 0.5% to 3.3% of the loan amount — is removed from your closing costs.¹²

The Five Categories That Qualify for a Waiver

The exemptions are set by 38 U.S.C. § 3729(c) and apply to every VA-backed loan type: purchases, cash-out refinances, and Interest Rate Reduction Refinancing Loans.¹ The waiver is tied to your status, not to how many times you have used the benefit, so if you qualify, every future VA loan is also fee-free.²

Receiving Service-Connected Disability Compensation

This is the most common path. What matters is that VA compensation is actually being paid to you; the exact rating percentage is secondary. A veteran rated at 10% or higher receiving monthly payments clearly qualifies. Less obviously, a veteran with multiple 0% service-connected disabilities can also qualify when those combined conditions result in compensation under 38 C.F.R. § 3.324.³

Entitled to Compensation but Receiving Other Pay

If VA records show you would be receiving disability compensation but you chose retirement pay or active-duty pay instead, the exemption still applies. Federal law recognizes the underlying eligibility regardless of which payment stream you took.¹

Active-Duty Purple Heart Recipients

If you are currently serving on active duty and have been awarded the Purple Heart, you are exempt from the funding fee, regardless of whether you have any disability rating. You provide evidence of the award on or before your loan closing date. No disability claim or compensation determination is required.¹

Qualifying Surviving Spouses

If your spouse died during active military service or from a service-connected disability, federal law treats you as a veteran for VA home loan purposes, giving you the same benefits your spouse would have had, including the fee waiver.¹ Surviving spouses receiving Dependency and Indemnity Compensation (DIC) also qualify.²

Active-Duty Members With a Pre-Discharge Rating

Active-duty service members who file disability claims before separating, often through the Benefits Delivery at Discharge program, can qualify if the VA issues a proposed or memorandum disability rating before closing. Under 38 U.S.C. § 3729(c)(2), that rating causes the service member to be treated as receiving compensation from the date of the rating, even before actual payments begin.¹

Timing controls this one. If your claim is still pending and no proposed or memorandum rating has been issued before closing, you are not exempt at closing, and a rating issued afterward will not entitle you to a refund. Your lender should submit VA Form 26-8937 to check the claim status; if the VA returns “Non-Exempt — In Development,” the waiver does not apply.⁴

How the Waiver Gets Applied at Closing

Your exemption status lives on your Certificate of Eligibility (COE), which contains a field marking you as exempt or non-exempt. Lenders treat the COE as the primary verification. You can request yours online at VA.gov by signing in with a verified account; if the VA already has the necessary records, it may be issued automatically.⁵

The lender then confirms the waiver through the VA’s WebLGY system, which verifies exemption status in real time. That confirmation must be in the loan file before your closing date. Once verified, the lender removes the funding fee from your closing disclosure. You do not sign anything separate; the fee simply is not charged.

If Your COE Says Non-Exempt but You Think You Qualify

Tell your lender before closing. For most borrowers who are not on active duty, the lender should request an updated COE to capture any changes in exemption status, such as a recently granted disability rating. For active-duty members with a pre-discharge claim in progress, the lender submits VA Form 26-8937 so the VA can research the claim and reissue the COE with the current information.⁴

VA guidance specifically warns lenders against telling apparently eligible borrowers to close, pay the fee, and seek a refund later; that approach is treated as a lender error. If yours suggests it, push back and ask that your exemption status be resolved before you sign.⁴

Refunds After a Retroactive Rating or Lender Error

If you paid the funding fee at closing and later receive a disability rating with an effective date on or before your closing date, you are entitled to a refund. This commonly happens when a claim filed around the time of purchase is decided after the loan closes; the retroactive effective date is what triggers refund eligibility.²

A proposed or memorandum rating issued after your closing date does not, by itself, get you a refund. The rating’s timing relative to closing is what matters.²

To start a refund, contact your VA Regional Loan Center at 877-827-3702, Monday through Friday, 8:00 a.m. to 6:00 p.m. ET. Publicly available VA guidance does not set a specific statutory deadline for requesting a refund, but act promptly once your retroactive rating is finalized. The VA issues the refund directly to the veteran or surviving spouse.⁴

If the lender charged the fee despite documented proof of your exemption, the lender initiates the correction through the VA Funding Fee Payment System, uploading the closing disclosure and reason for the refund to WebLGY. When the erroneous charge is confirmed, the VA issues the refund directly to you rather than routing it through the lender.⁴

If You Do Not Qualify, You Can Still Finance the Fee

None of the five categories creates a way to negotiate the fee down; you either qualify for the full waiver or you pay in full. What the VA does allow is financing the fee into your loan balance, so you do not have to bring it in cash at closing. This is the only closing cost the VA permits you to finance on a purchase or construction loan; every other charge is paid at closing.² Rolling the fee into the loan raises your balance and the interest you pay over time, but it keeps your cash to close lower while you work through whether an exemption might still apply.

1
Office of the Law Revision Counsel. 38 U.S.C. 3729 – Loan Fee
2
Veterans Affairs. VA Funding Fee and Loan Closing Costs
3
Veterans Benefits Administration. VA Derivative Benefits Eligibility Service Connected Matrix
4
Veterans Benefits Administration. Circular 26-23-19 – VA Funding Fee Exemption and Refund Procedures for Lenders
5
Veterans Affairs. Request a VA Home Loan Certificate of Eligibility (COE)