Funding Fee Returns on VA Loans?

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VA loans funding fee payments are required  for VA loans. Few borrowers are exempt from paying the fee. The Department of Veterans Affairs said those who are eligible for VA compensation for service-related medical conditions are not required to pay such a fee.

But in some cases Vets don’t have official confirmation of their VA disability status when applying for a VA home loan. Without their confirmation they are required to pay the funding fee until the veteran’s disability status has been approved by the VA. Once approved a refund is due-but that refund is not automatic. Once a Vet gets notice of his VA disability rating, it’s up to the veteran to apply for the refund.

But its not over after that, its not when the refund will be payed that is the biggest concern but how that refund is applied. VA loan rules forbid borrowers from getting cash back on new purchase transactions–does this rule also apply to funding fee refunds?

No, but the VA does have regulations on how the money is to be refunded based on how the funding fee was paid originally.

Basically if the Veteran paid the funding fee in cash, the refund will be be made out to cash. But if the veteran included the VA loan funding fee into the loan amount, VA regulations prohibit getting cash back–the refund is applied to the loan balance instead. Here’s the exact wording of the VA loan rule as found in Chapter Eight of the VA Lender’s Handbook:

“A refund is appropriate if:

  • an exempt veteran paid a funding fee, or
  • a miscalculation of the fee caused an overpayment.

If the veteran was overcharged, the following applies:

  • A veteran who paid cash for the funding fee receives a cash refund for the amount of the overpayment.

In the case of a veteran who paid the funding fee out of loan proceeds, the lender must apply the overpayment against the loan balance.  Submit evidence to VA that the refund was applied to the loan’s principal balance. ”

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