How VA Disability Compensation Waives Your Funding Fee

The VA funding fee exemption for service-connected disability is one of the most valuable — and most overlooked — benefits in the VA loan program. On a $400,000 purchase at the 2.15% first-use rate, that's $8,600 in savings.

Who qualifies for the exemption

• Veterans currently receiving VA compensation for a service-connected disability, at any rating percentage
• Veterans who would be entitled to compensation, but who elect to receive retirement or active-duty pay instead
• Veterans rated eligible for compensation based on a pre-discharge disability exam or review
• Active-duty service members who have received the Purple Heart
• Surviving spouses of a veteran who died in service or from a service-connected disability, or who are receiving Dependency and Indemnity Compensation (DIC)

How the exemption is proven

Your lender confirms exemption status by pulling your Certificate of Eligibility (COE) — it will explicitly state whether you're exempt from the funding fee. Lenders verify current disability compensation through the VA's system rather than relying on a self-reported rating.

What if your rating is approved after you close?

If you close on your loan before your disability claim is decided, and the VA later approves a service-connected rating retroactive to before your closing date, you can request a refund of the funding fee you paid. This is a common scenario for veterans separating from active duty who filed a pre-discharge claim that resolves after closing — ask your lender or the VA regional loan center about the refund process.

What the exemption does not affect

Disability exemption removes only the funding fee — it doesn't change underwriting, doesn't waive the appraisal, and doesn't affect residual income requirements. Disability compensation itself, however, is non-taxable income and can often be grossed up for qualifying purposes, which independently helps many disabled veterans qualify for a larger loan.