According to VA data cited by the Loan Guaranty Service in June 2026, more than half of Veterans who obtained a VA-guaranteed home loan since 2021 were exempt from the funding fee. That means the single largest closing cost on a VA loan, 2.15% of the loan amount on a first-use purchase with no down payment, simply does not apply to a majority of borrowers. The pain point is that many Veterans who qualify still pay it, because the exemption must be documented before closing and a rating that arrives one day late does not count. This guide explains exactly who is exempt in 2026, how the exemption is verified, how to time a claim against a closing date, and how refunds work when the rating comes through afterward.
Key Takeaways
- Confirm the exemption rule: any VA disability compensation award, even 10%, removes the funding fee entirely; there is no minimum rating.
- Verify exemption status on the Certificate of Eligibility (COE) before closing, because VA policy requires lenders to establish the status first, not refund later.
- Calculate the stakes: on the FY2025 average VA loan of $390,101, the first-use fee is about $8,387 and the subsequent-use fee is about $12,873.
- Time the closing carefully when a claim is pending, since a proposed or memorandum rating issued after the closing date does not create a refund.
- Request a refund through the VA Regional Loan Center when a later award carries an effective date before the closing date.
- Track the 2026 changes: the funding fee is now tax-deductible for eligible new borrowers, and the VALOR Act (H.R. 7598) would reimburse Veterans whose claims were pending at closing.
Table of Contents
- Who Qualifies for the VA Funding Fee Waiver in 2026
- Proving Exemption Status Before Closing
- Timing Strategy: Rating First or Close First
- Step-by-Step: Locking In a $0 Funding Fee
- After Closing: Refunds, Deductions, and Pending Legislation
- Frequently Asked Questions
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From the AVOY VA Benefits Mastery Library VA Compensation and Back Pay Guide covers this in full depth, with step-by-step guidance for exactly this situation. Get the Book → |
Who Qualifies for the VA Funding Fee Waiver in 2026
The frustration starts with the word "waiver." Veterans search for an application, a form to fill out, or a box to check, and find nothing. That is because the funding fee exemption is not something a Veteran applies for. It is a status VA assigns automatically, based on records VA already holds, and it appears on the Certificate of Eligibility. The problem is not getting approved for the waiver; the problem is making sure VA's records reflect the right status on the day the loan closes.
VA.gov (page updated January 15, 2026) lists five situations in which no funding fee is owed. The first is receiving VA compensation for a service-connected disability. The second is being eligible for that compensation but receiving military retirement pay or active-duty pay instead. The third is receiving Dependency and Indemnity Compensation (DIC) as the surviving spouse of a Veteran. The fourth is a service member who has received a proposed or memorandum rating before the loan closing date, based on a pre-discharge claim, stating eligibility for compensation. The fifth is an active-duty member who provides evidence of a Purple Heart on or before the closing date.
The scale of the exemption is larger than most borrowers expect. VA News reported on June 11, 2026, that since 2021 more than half of Veterans who obtained a VA-guaranteed home loan were exempt from paying the funding fee. With 528,340 loans guaranteed in fiscal year 2025 according to the VBA Annual Benefits Report, that is well over a quarter-million exemptions in a single year.
The Retiree and Active-Duty "Eligible But Not Paid" Rule
The second category deserves attention because it is the one most often missed. A military retiree who has a service-connected rating but waives VA compensation to receive full retirement pay is still exempt. So is an active-duty member with an approved rating whose compensation is suspended while on active duty. The statutory test in 38 U.S.C. 3729(c) is entitlement, not receipt. A Veteran in this position should expect the COE to reflect the exemption, but should confirm it rather than assume it. The Purple Heart exemption, added by the Blue Water Navy Vietnam Veterans Act of 2019, applies only while the recipient is still on active duty; VA Circular 26-19-30 states that once discharged, the Veteran must qualify under one of the compensation-based categories instead.
Proving Exemption Status Before Closing
The most expensive mistake in this process is closing on a loan with the plan to "sort out the fee later." VA Circular 26-19-17 (Change 1) addresses this directly: lenders must not advise Veterans who believe they are exempt to close first and request a refund afterward. The exemption status must be established before closing. A Veteran who ignores this and closes with a fee financed into the loan may still get a refund later, but only if the facts support it, and the refund process is separate from the loan.
The stakes are concrete. The VBA Annual Benefits Report shows the average VA loan in fiscal year 2025 was $390,101. At the first-use, no-down-payment rate of 2.15%, the funding fee on that loan is roughly $8,387. At the subsequent-use rate of 3.3%, it is roughly $12,873. Both figures are often rolled into the loan and paid with interest over thirty years.
The COE and VA Form 26-8937
The Certificate of Eligibility is the primary evidence document. VA.gov states that when a COE is requested, VA verifies both eligibility for the loan and whether the borrower is exempt from the funding fee due to a service-connected rating. The COE can be requested online through VA.gov, through the lender using VA's Web LGY system, or by mail using VA Form 26-1880. Lenders can also submit VA Form 26-8937, Verification of VA Benefits, to the Regional Loan Center to confirm exemption status, including for surviving spouses receiving DIC. A surviving spouse requesting a COE must submit VA Form 26-1817 if receiving DIC, or VA Form 21P-534EZ with the marriage license and death certificate if not.
Pending Claims, Proposed Ratings, and the Closing-Date Rule
For a Veteran with a claim pending, the closing date is the line that matters. VA.gov is explicit: if a proposed or memorandum rating is issued after the loan closing date, the funding fee is still owed and no refund is available based on that rating. After the 2019 refund initiative, VA directed lenders to ask about pending disability claims during underwriting and to obtain an updated COE no more than three days before closing when a claim is pending. A Veteran with a claim in progress should tell the lender, in writing, and confirm the three-day COE refresh happens. The evidence in the claim itself, service treatment records, private medical records, lay statements, and any PACT Act presumptive that applies, should already be in the file; the loan process cannot speed up the rating, but it can make sure the rating is captured the moment it is issued.
Timing Strategy: Rating First or Close First
Veterans with a claim pending face a real decision: delay the closing until the rating is issued, or close now and accept the fee. There is no universal answer, but the math should be visible before the choice is made. VA.gov's own example uses a $200,000 home with a $10,000 down payment: the fee is 1.5% of the $190,000 loan, or $2,850. With no down payment on a first-use loan, the same $200,000 purchase carries a 2.15% fee of $4,300. On a subsequent use with less than 5% down, it is 3.3%, or $6,600.
Fiscal year 2025 data shows why this matters at scale. Of 323,832 VA purchase loans that year, 240,749 were made with no down payment, meaning nearly three in four VA buyers were exposed to the highest fee tier unless exempt. And 265,411 loans, 50.2% of the total, were made using restored entitlement, which places most of those borrowers in the 3.3% subsequent-use bracket.
The 2.15% Versus 3.3% Math
The rate charts effective April 7, 2023, and still in force for 2026, set purchase and construction loan fees at 2.15% (first use, under 5% down), 1.5% (5% or more down), and 1.25% (10% or more down). After first use, the under-5% rate rises to 3.3% while the 1.5% and 1.25% tiers stay the same. Cash-out refinances are 2.15% first use and 3.3% after. Interest Rate Reduction Refinance Loans (IRRRLs) are 0.5%, loan assumptions 0.5%, manufactured homes not permanently affixed 1%, and Native American Direct Loans 1.25% purchase and 0.5% refinance. A Veteran who has already used the benefit once and is buying again with no down payment is looking at the top of the chart. If a claim is close to decision, the difference between closing this month and next month can be the entire 3.3%.
Two other facts shape the strategy. First, a larger down payment lowers the fee percentage, so a Veteran who cannot wait for a rating may reduce exposure by putting 5% down. Second, the fee is financeable, but VA.gov notes it is the only closing cost that can be rolled into a purchase loan; every other cost must be paid at closing.
Step-by-Step: Locking In a $0 Funding Fee
The sequence below reflects VA guidance for lenders and the process described on VA.gov. The goal is simple: the exemption must be documented on the COE that the lender holds on closing day.
- Confirm compensation status. Log in to VA.gov and review the current rating decision and payment status. A Veteran receiving compensation at any percentage is exempt. A retiree with a rating who waived compensation is also exempt, but should have the rating letter on hand.
- Request the COE early. Use the online request at VA.gov, ask the lender to pull it through Web LGY, or mail VA Form 26-1880. Check that the COE shows the funding fee exemption. If it does not and the Veteran believes it should, contact the Regional Loan Center at 877-827-3702 before proceeding.
- Disclose any pending claim in writing. Tell the lender that a claim, a supplemental claim, or a pre-discharge (BDD) claim is in process. VA policy directs lenders to ask; the Veteran should not wait to be asked.
- Refresh the COE within three days of closing. When a claim is pending, the lender should obtain an updated COE no more than three days before closing. If a proposed or memorandum rating arrived in the interim, this is the step that captures it.
- Review the Closing Disclosure line by line. The funding fee appears as a distinct line item. If the COE shows an exemption and the fee is still listed, stop and resolve it before signing. VA Circular 26-19-17 places the burden on lenders to establish status before closing, and a Veteran who signs anyway is relying on the refund process instead.
Requesting the COE
VA.gov (updated July 24, 2026) lists the documents needed: a DD214 for Veterans; a statement of service signed by a commander, adjutant, or personnel officer for active-duty members; and NGB Form 22 and NGB Form 23 for discharged National Guard members who were never activated. Requesting online is fastest. Mail requests take longer, and VA notes that the COE status can be checked online at any time.
What Lenders Must Do Before Closing
VA's 2019 policy changes, announced with the completion of the $400 million refund initiative, require lenders to inquire about a Veteran's disability claim status during underwriting and to obtain an updated COE no more than three days before closing when a claim is pending. VA also reported that its internal review covered 130,000 cases, an average of 16,000 loans per week, with most incorrect charges traced to exemption status that changed after closing. The system now has guardrails, but they work only when the Veteran's claim status is known to the lender.
After Closing: Refunds, Deductions, and Pending Legislation
A Veteran who paid the fee and later receives a compensation award may be owed money back. VA.gov states that a refund is available when VA compensation is later awarded for a service-connected disability and the effective date of that compensation is retroactive to before the loan closing date. This is the same effective-date logic that governs back pay: the award reaches back to the date of claim or intent to file, and if that date precedes the closing, the exemption is treated as having existed on closing day.
The 2019 initiative shows the scale of what goes unclaimed. VA issued more than $400 million in refunds after reviewing loans spanning nearly two decades, and the agency stated that most of those refunds went to Veterans whose exemption status changed following a disability rating issued after closing. Since July 1, 2019, refunds are paid directly to the Veteran rather than applied to the loan balance, even when the fee was financed.
How to Request a Refund
There is no online refund form. VA.gov directs Veterans who believe they are eligible to call the VA Regional Loan Center at 877-827-3702, Monday through Friday, 8:00 a.m. to 6:00 p.m. ET. Have the rating decision letter showing the effective date, the loan closing date, and the Closing Disclosure showing the fee paid. The lender or servicer processes the refund through VA's Funding Fee Payment System with the destination set to the Veteran. If the loan is in default, VA may advise using the refund to bring the loan current, but the payment still goes to the Veteran. A Veteran who disagrees with a denial of the underlying compensation claim has the standard AMA options: Higher-Level Review on VA Form 20-0996, Supplemental Claim on VA Form 20-0995, or Board appeal on VA Form 10182, and a later grant with an earlier effective date can reopen the refund question.
If the Rating Came After Closing: The Tax Deduction and the VALOR Act
Two 2026 developments help Veterans who paid the fee. First, VA News reported on February 18, 2026, that starting this year Veterans, service members, and surviving spouses can deduct the VA funding fee on their taxes when purchasing a home with a VA-guaranteed loan; VA's statement describes this as informational and directs borrowers to a tax professional. Second, on February 19, 2026, Representatives Mike Levin and James Moylan reintroduced the Veterans Assistance for Loan Origination Relief (VALOR) Act, H.R. 7598, which would require VA to reimburse a Veteran or transitioning service member who filed a claim or intent to file before closing, paid the fee, and later received a rating. As of this writing it is a bill, not law; Veterans should confirm its status on Congress.gov before relying on it.
Take the Free VA Claim Readiness Test
The funding fee exemption is one of the clearest examples of why a service-connected rating matters beyond the monthly check. A single approved condition at 10% can remove a five-figure fee from a home purchase. Veterans who have not yet filed, or who have a claim sitting unfinished, can find out in minutes whether the evidence is ready. Visit avoyvet.com, take the Free VA Claim Readiness Test, and ask AVOY Veteran Navigator AI how a rating decision, its effective date, and a home loan closing date fit together.
Frequently Asked Questions
Does a 10% rating really waive the whole funding fee?
Yes. The exemption in 38 U.S.C. 3729(c) applies to any Veteran receiving VA compensation for a service-connected disability, and VA.gov's eligibility list does not set a minimum percentage. A 10% rating for tinnitus produces the same exemption as a 100% rating. The AVOY VA Benefits Mastery Library treats this as one of the strongest reasons to file even a modest claim before a home purchase: on the fiscal year 2025 average loan of $390,101, a 10% rating removes roughly $8,387 on a first-use purchase and roughly $12,873 on a subsequent use. The rating must be in effect, or the effective date must precede closing, for the exemption or a refund to apply.
What if the rating decision arrives two weeks after closing?
It depends on the effective date, not the decision date. If the award's effective date is earlier than the closing date, VA.gov states a refund may be available. If the decision is a proposed or memorandum rating issued after closing, no refund is available on that basis. This is why the effective date, which typically reaches back to the date of claim or intent to file, is the number to watch. A Veteran who filed an Intent to File months before closing and later receives a grant with that earlier effective date should call the Regional Loan Center at 877-827-3702 with the rating letter and the Closing Disclosure.
A military retiree waived VA compensation to keep full retired pay. Is the fee still waived?
Yes. VA.gov lists as exempt any Veteran who is eligible to receive compensation for a service-connected disability but is receiving retirement or active-duty pay instead. The VBA Annual Benefits Report uses the same language. The retiree should confirm the COE shows the exemption, because VA's records must reflect the rating for the status to appear. If the COE is silent, the lender can submit VA Form 26-8937 to the Regional Loan Center to verify. The exemption does not depend on whether the Veteran elected CRDP, CRSC, or a full waiver.
Can a surviving spouse get the funding fee waived?
A surviving spouse receiving Dependency and Indemnity Compensation is exempt. VA Circular 26-19-17 (Change 1) clarified that the spouse must actually be in receipt of DIC; a surviving spouse who is eligible for the home loan benefit but not receiving DIC is not exempt. To request a COE, a spouse receiving DIC submits VA Form 26-1817; one not receiving DIC submits VA Form 21P-534EZ with the marriage license and the Veteran's death certificate. Fiscal year 2025 data shows 4,806 loans guaranteed to un-remarried surviving spouses, so the exemption question comes up thousands of times a year.
Is the funding fee charged on an IRRRL streamline refinance for an exempt Veteran?
No. The exemption applies to every VA loan type, including the 0.5% IRRRL fee. VA policy requires a COE for IRRRLs except when the Veteran has already been determined exempt in Web LGY, when the entitlement belongs to a surviving spouse, or when the borrowing spouse was a co-borrower on the original loan with a Veteran who has since died. Fiscal year 2025 saw 119,458 IRRRLs, 22.6% of total volume, so an exempt Veteran refinancing should verify the exemption carries over rather than assume the lender checked.
Is the funding fee tax-deductible in 2026?
VA News reported on February 18, 2026, that eligible Veterans, service members, and surviving spouses can now deduct the VA funding fee on their taxes when purchasing a home with a VA-guaranteed loan. VA's statement links to the enacting legislation and states that the post is informational, not tax advice. Questions posted to VA's own article, such as whether the deduction applies to refinances or to loans closed in prior years, were not answered in the article. A Veteran who paid the fee should raise the deduction with a tax professional and keep the Closing Disclosure showing the amount.
Should a Veteran delay closing to wait for a pending rating?
The AVOY approach is to put the numbers on paper and decide with the facts in view. Multiply the loan amount by the applicable fee rate: 2.15% first use, 3.3% subsequent use, less with a down payment. Compare that to the cost of delay, including rate locks, lease extensions, and seller patience. Then check the claim's status on VA.gov and whether a proposed rating is expected. If the claim was filed with an Intent to File well before closing and is later granted, a refund may still be available based on the effective date, which softens the cost of closing first. No outcome or timeline can be guaranteed; the decision should rest on verified numbers, not hope.
Educational information only — not legal, medical, or claim representation, and not affiliated with the U.S. Department of Veterans Affairs. For help filing or appealing, contact a VA-accredited VSO (often free), claims agent, or attorney. For current rates, forms, and deadlines, see VA.gov.
