Deciphering the VA Lender’s Handbook Chapter 8 Part 5
This article and the one following it will both be dedicated to explaining the VA funding fee in detail so that you as a borrower will know what it is, what it’s for, why it exists, and most importantly, how and when you will pay it and what the lender’s role in facilitating that payment is. The lender is required to verify your veteran status to see whether you are exempt from the funding fee, determine what amount you are required to pay (if not exempt), collect the required fee from you at closing, send the fee to the VA in a timely manner, get a hard-copy of proof that the funding fee has been paid, and submit that proof to the VA along with the packet containing the information on the newly-closed loan. If the borrower has elected to pay the funding fee from loan proceeds, the cash will not be due from the borrower upfront, but will still be paid by the lender.
We’re going to go through all the steps that the lender is required to take, and talk about how they relate to you as the borrower. First is determining who is exempt from the funding fee and who is not. A general rule of thumb is that those currently receiving or eligible to receive disability compensation of at least 10% are exempt from the funding fee along with surviving spouses of veterans who died in service or due to service-connected disabilities. The Lender’s Handbook gives us the specifics:
• Veterans receiving VA compensation for service-connected disabilities.
• Veterans who would be entitled to receive compensation for service connected
disabilities if they did not receive retirement pay.
• Veterans who are rated by VA as eligible to receive compensation as a
result of pre-discharge disability examination and rating or on the basis of a
pre-discharge review of existing medical evidence (including service
medical and treatment records) that results in issuance of a memorandum
• Veterans entitled to receive compensation, but who are not presently in
receipt because they are on active duty.
• Surviving spouses of veterans who died in service or from service connected
disabilities (whether or not such surviving spouses are veterans
with their own entitlement and whether or not they are using their own
entitlement on the loan).
When a lender is working to verify whether you are exempt, they have a few options for things they can do. The lender can retrieve a completed and signed VA Form 26-8937 which indicates the borrower’s exempt status (this is the most common), or for veterans who elected retirement pay instead of VA compensation, a copy of the original VA notification of disability rating and proof of the retirement income the veteran is receiving will provide sufficient verification. For surviving spouses, the Certificate of Eligibility he or she receives will denote their status as an unmarried surviving spouse, who are exempt from the funding fee. If the lender is still unable to properly verify that the borrower is exempt after reviewing the appropriate documents, they must work directly with the VA on verification.
As a borrower, if you might be eligible for disability but have not been examined or applied for it, you can make life on yourself and your lender much easier by applying for it beforehand. Even if you decline the payments, being eligible for disability saves you thousands of dollars by exempting you from the funding fee. The lender is required to submit the documentation used to verify exempt status along with the loan packet, so be prepared to provide the lender a copy of anything they need. In cases where verification of exempt status cannot be done before loan closing, the funding fee must be charged as if the borrower was not exempt. If you are claiming exempt status but not able to verify it, the lender is required to include that information in the packet. The VA will make the final decision, and theoretically they will notify you either way. However, you should be prepared to follow-up with the VA, especially if your disability claim is still pending at the time of loan closing. You will want to contact your VA RLC to request a refund of the funding fee if they determine that you are eligible for disability compensation after-the-fact.