VA Funding Fee Exemption: 38 U.S.C. 3729(c) Disability Rules, COE Status, and Refunds

Who is exempt from the VA funding fee under 38 U.S.C. 3729(c)?

The statutory rules governing the VA funding fee waiver are set forth in 38 U.S.C. 3729(c)(1) and (c)(2) and VA.gov’s funding fee guide:

1. Veterans receiving VA compensation for a service-connected disability

Under 38 U.S.C. 3729(c)(1), no loan fee may be collected from “a veteran who is receiving compensation” (defined in 38 U.S.C. 101(13) as a monthly payment for a service-connected disability):

• 10% minimum compensable rating: Any combined rating from 10% to 100% waives the entire fee. Under the VA disability pay chart effective 2025-12-01, a 10% rating pays $180.42 per month for a veteran alone and a 100% rating pays $3,938.58 per month; both receive the same 100% funding fee waiver.
• 0% non-compensable ratings and VA Pension: A standalone 0% rating does not pay monthly compensation and does not waive the fee unless paired with monthly Special Monthly Compensation (such as SMC-K) or multiple 0% conditions paying at 10% under 38 CFR 3.324. Needs-based Veterans Pension (38 U.S.C. 101(15)) does not waive the fee.

2. Veterans eligible for compensation who receive retirement or active-duty pay instead

Under 38 U.S.C. 3729(c)(1), the waiver covers a veteran “who, but for the receipt of retirement pay or active service pay, would be entitled to receive compensation.” This protects military retirees rated below 50% who elect full DoD retired pay rather than waiving retired pay for VA compensation under 38 U.S.C. 5304–5305, as well as Reserve and National Guard members with a compensable VA rating who waive VA compensation during active-duty recall or drill days.

3. Surviving spouses receiving Dependency and Indemnity Compensation (DIC)

Under 38 U.S.C. 3729(c)(1) and VA.gov’s funding fee rules, you are exempt if you receive Dependency and Indemnity Compensation (DIC) as the surviving spouse of a veteran, or if your spouse died in active military, naval, air, or space service or from a service-connected disability. Under VA.gov’s surviving spouse home loan guide, surviving spouses receiving DIC request a COE using VA Form 26-1817 and the veteran’s DD-214 if available; those not yet receiving DIC submit VA Form 21P-534EZ, a marriage license, and the death certificate.

4. Service members with a pre-discharge proposed or memorandum rating

Under 38 U.S.C. 3729(c)(2)(A)–(B), a service member is treated as receiving compensation as of the date of a pre-discharge rating if rated eligible to receive compensation either from a pre-discharge disability examination and rating (such as a BDD or IDES proposed rating) or a pre-discharge review of existing medical evidence resulting in a memorandum rating. As VA.gov states, the proposed or memorandum rating must be received before the loan closing date.

5. Active-duty service members awarded the Purple Heart

Under 38 U.S.C. 3729(c)(1) (enacted by Public Law 116-23, § 6(c)), an active-duty member of the Armed Forces who provides evidence of having received a Purple Heart on or before the loan closing date (award orders, certificate, or military personnel records) is exempt from the funding fee. Once discharged from active duty, a Purple Heart recipient qualifies under the standard VA disability compensation rules.

Current VA funding fee percentages (effective April 7, 2023)

When a borrower is not exempt under 38 U.S.C. 3729(c), the funding fee is calculated as a percentage of the total loan amount. Under 38 U.S.C. 3729(b)(2) (governing loans closed on or after April 7, 2023, and before June 9, 2034) and VA.gov’s official rate charts, the current rates effective April 7, 2023 are listed below.

1. VA-backed purchase and construction loans (effective April 7, 2023)

Rates for Veterans, active-duty service members, and National Guard and Reserve members:

As VA.gov illustrates, the funding fee applies only to the loan amount, not the purchase price: on a first-time purchase of a $200,000 home with a $10,000 (5%) down payment, the fee is 1.5% of the $190,000 loan amount ($2,850).

Prior-use exceptions: If you previously used a VA loan to purchase only a manufactured home, you still pay the first-time funding fee rate. Under 38 U.S.C. 3729(b)(4)(D)(ii), if a home securing a prior VA loan was substantially damaged or destroyed by a presidentially declared major disaster (42 U.S.C. 5170), a VA loan made within three years strictly to repair or rebuild that dwelling is also treated as a first-use loan.

2. Cash-out refinancing, NADL, and other VA loan types (effective April 7, 2023)

Under VA.gov’s rate charts, these rates do not change based on down payment amount:

Dollar savings with the VA funding fee exemption

How the exemption shows on your Certificate of Eligibility (COE)

Your lender verifies your VA loan entitlement and funding fee status using your Certificate of Eligibility (COE). Under VA.gov’s COE instructions, you can obtain a COE online at VA.gov, through your lender’s WebLGY portal, or by mailing VA Form 26-1880 (or VA Form 26-1817 for surviving spouses) with your DD-214 or Statement of Service.

The COE includes a Funding Fee status field showing Exempt or Non-Exempt (or Exempt - Verify Prior to Closing). If you receive monthly VA compensation, WebLGY automatically marks your COE as Exempt. If your COE displays Non-Exempt despite qualifying through retired pay waiver, a pre-discharge BDD proposed or memorandum rating, active-duty Purple Heart orders, or a recent award:

• VA Form 26-8937 (Verification of VA Benefits): Your lender submits VA Form 26-8937 or an electronic WebLGY request to the VA Regional Loan Center prior to closing.
• Uploading proof: Submitting your VA Rating Decision, pre-discharge proposed rating, or active-duty Purple Heart evidence through WebLGY updates your COE to Exempt before closing.

Pending disability claims and retroactive funding fee refunds

If your VA disability claim is pending on your closing date—without a pre-discharge proposed or memorandum rating issued before closing—you must pay the funding fee at closing (in cash or financed into the loan under 38 U.S.C. 3729(a)(2)).

Qualifying for a retroactive funding fee refund

Under VA.gov’s funding fee refund policy, you are eligible for a refund of the VA funding fee if you are later awarded VA compensation for a service-connected disability and the effective date of your VA compensation is retroactive to before the date of your loan closing. Submitting a VA Intent to File (VA Form 21-0966) before closing—or filing within one year of military discharge under 38 CFR 3.400(b)(2)—protects an effective date prior to closing.

Post-closing proposed or memorandum ratings

VA.gov states: “If you get a proposed or memorandum rating after your loan closing date, you’ll still need to pay the funding fee. You won’t be eligible for a refund based on this rating.” Service members must receive a proposed or memorandum rating before closing to waive the fee on that basis.

How to request your refund

Once your VA disability award is granted with a retroactive effective date before closing, gather your VA Disability Award Letter and Closing Disclosure, then contact your mortgage lender/servicer or call your VA Regional Loan Center at 877-827-3702 (TTY: 711), Monday–Friday, 8:00 a.m. to 6:00 p.m. ET. Refunds are processed through the VA Funding Fee Payment System (FFPS) and paid directly to you or credited against the financed loan balance.

Other loan closing costs and the 4% seller concession rule

Under 38 CFR 36.4313 and VA.gov closing cost rules, exempt borrowers still negotiate standard closing costs:

• Itemized fees and 1% lender cap (38 CFR 36.4313(d)): Permitted costs include the VA appraisal fee, credit report, title insurance, recording fees, taxes, survey, hazard insurance, and a lender origination fee capped at 1% of the loan amount.
• Cannot finance closing costs on purchase loans: On a purchase or construction loan, only the VA funding fee can be financed into the loan; other closing costs must be paid at closing or covered by credits.
• Seller credits and 4% seller concessions: Sellers can pay normal loan-related closing costs without limit, plus seller concessions (paying off buyer debts, prepaying hazard insurance, or covering a non-exempt buyer’s funding fee) up to 4% of the home’s reasonable value on the VA Notice of Value.

Combining ratings, secondary conditions, and accredited representation

If you hold a 0% service-connected rating or have unfiled service-connected or secondary conditions under 38 CFR 3.310(a), reaching a 10% combined rating unlocks both monthly compensation and the VA funding fee exemption. Model combined evaluations with our VA combined rating calculator, check monthly rates on our VA disability pay chart, and estimate past-due pay using our VA back pay calculator.

For help filing a pre-discharge BDD claim, initial claim, or Supplemental Claim, work with a VA-accredited representative. Chartered Veterans Service Organizations (VSOs)—such as DAV, VFW, and the American Legion—assist free of charge, while VA-accredited claims agents and attorneys handle appeals. No representative can promise an outcome; verify credentials via the VA Office of General Counsel Accreditation Search.