VA Home Loan and Service-Connected Disability

By Shirley Chia. Published 2026-06-06. Source: 38 USC Chapter 37, 38 CFR Part 36.

Core VA loan mechanics

The VA Home Loan is a guaranty program, not a direct-lending program. The VA does not lend money. Private lenders (banks, credit unions, mortgage brokers) make the loan; the VA guarantees a portion of it against default. The guaranty allows the lender to offer terms otherwise reserved for borrowers with substantial down payments.

What you get

• Zero down payment. Up to the lender's loan ceiling, no down payment required.
• No private mortgage insurance. Conventional loans charge PMI when LTV exceeds 80%. VA loans never charge PMI.
• Lower interest rates. Typically 0.25% to 0.5% below conforming conventional rates due to the guaranty.
• Lenient credit standards. Most VA lenders accept FICO 580-620; some go lower with compensating factors. The VA itself sets no minimum FICO.
• Capped seller-paid closing costs. Seller may contribute up to 4% of the loan amount toward buyer closing costs and the funding fee.

Who qualifies (general)

• 90+ days of active-duty wartime service.
• 181+ days of peacetime service.
• 6+ years of National Guard or Reserve service.
• Any service-connected discharge regardless of length.
• Surviving spouses of veterans who died on active duty or from service-connected conditions.

The funding fee and the disability waiver

The VA charges a one-time funding fee on each VA loan to capitalize the guaranty program. The fee schedule in effect for 2026:

The fee is paid at closing. It can be financed into the loan balance, which is how most VA borrowers handle it. On a $400,000 purchase with 0% down at first use, the financed fee adds $8,600 to the loan balance, increasing the principal financed to $408,600.

The disability waiver

The funding fee is waived in full for any veteran who is "in receipt of compensation" for a service-connected disability, or who would be entitled to compensation but for receipt of retired pay, under 38 USC 3729(c). The waiver also applies to surviving spouses of veterans who died in service or from service-connected conditions, and to Purple Heart recipients on active duty.

Critical detail: there is no minimum rating threshold. A 0% service-connected rating qualifies for the waiver as fully as a 100% rating does. The 0% rating means service connection is established but no compensation is paid — but the waiver statute references service-connected status, not compensation amount, and VA practice extends the waiver to 0% ratings.

The waiver is automatic when the Certificate of Eligibility (COE) is generated. If a veteran closes a loan, pays the funding fee, and is later granted a retroactive rating that establishes pre-closing service connection, the VA refunds the fee. The refund request goes through the lender or directly to the VA.

Grossing up VA disability income for DTI

VA disability compensation is exempt from federal income tax under 38 USC 5301. For mortgage underwriting purposes, lenders are permitted (and the VA Lenders Handbook M26-7 directs them) to "gross up" tax-free income — multiply the monthly benefit by a tax-equivalency factor — when calculating the debt-to-income (DTI) ratio.

The standard gross-up factor is 1.25, representing the equivalent pre-tax income a borrower would need to net the same after-tax dollars at a 25% effective tax rate. Some lenders use 1.20 or 1.15 for conservative underwriting; some use the borrower's actual tax bracket if it is provably higher.

Worked: a 70%-rated veteran receives approximately $1,759/mo VA compensation in 2026. Grossed up at 1.25x: $2,199/mo qualifying income. At a 41% DTI ceiling, the gross-up alone supports roughly $902 more in monthly housing payment than the un-grossed-up benefit would support — translating to roughly $150,000 to $180,000 in additional loan size at current rates.

The gross-up applies to any non-taxable income, including VA disability, military disability retirement (Chapter 61), and DIC payments to survivors.

Loan limits — gone for full entitlement

Before 2020, VA loans were limited by county conforming loan caps tied to the FHFA conforming limit. The Blue Water Navy Vietnam Veterans Act of 2019 amended 38 USC 3703 to remove the loan limit for veterans with full entitlement, effective January 1, 2020.

"Full entitlement" means the veteran has no active VA loan and has not had a VA loan foreclosure with unrestored entitlement. Most first-time VA buyers have full entitlement. Veterans with an active VA loan or who have used the benefit and not yet had entitlement restored fall back to the county-cap-based calculation.

Practical effect: a veteran with full entitlement and qualifying income can borrow a multi-million-dollar VA loan with zero down. Lender underwriting (DTI, credit, reserves) becomes the binding constraint, not statutory limits. Jumbo VA loans above conforming limits are routine in high-cost coastal markets.

Refinance options

IRRRL — Interest Rate Reduction Refinance Loan

VA-to-VA streamline refinance. Used when interest rates drop and the veteran wants a lower rate without restructuring the loan. Key features:

• No appraisal required at most lenders (the existing VA-guaranteed loan serves as the underwriting basis).
• No income verification at most lenders.
• No credit re-pull at many lenders (some require a soft check).
• Funding fee 0.5% (waived for service-connected disabled veterans).
• Net tangible benefit test: the new payment must be lower than the old, unless the refinance switches from adjustable to fixed rate.
• Closing costs can be rolled into the loan.

IRRRL is the cheapest, fastest refinance product in U.S. mortgage lending. Veterans should track 30-year fixed VA rates and refinance whenever they can capture a 0.5%+ improvement net of closing costs.

Cash-Out refinance

Refinance into a new VA loan at higher principal balance, taking the difference as cash. Up to 100% LTV at most lenders (some cap at 90%). Subject to the standard purchase funding fee (2.15% first use, 3.3% subsequent — waived for service-connected disabled). Income, credit, and full appraisal required. Often used to consolidate non-mortgage debt, fund home improvements, or extract equity for other purposes.

How to apply

1. Obtain Certificate of Eligibility. File VA Form 26-1880 online via VA.gov or through a lender. Most COEs issue in seconds via the lender's automated portal.
2. Confirm disability status on COE. The COE notes "exempt from funding fee" if service-connected status is on file. If exempt status is missing but rating exists, contact the VA Regional Loan Center to correct.
3. Shop lenders. Rates and fees vary materially. Get at least 3 quotes — VA loan rates are competitive but not identical across lenders.
4. Pre-approval. The lender pulls credit, verifies income, and issues a pre-approval letter for offer purposes.
5. Find property and write offer. VA loans require the property to meet VA Minimum Property Requirements (safe, sound, sanitary). The VA appraiser confirms during the appraisal.
6. Close. Standard 30 to 45 days from offer acceptance.

Worked example

Sources cited in this article

• 38 USC Chapter 37 — Housing and Small Business Loans
• 38 USC 3729 — Loan fee (funding fee statute and waiver)
• 38 USC 3703 — Loan limits and entitlement
• 38 CFR Part 36 — Loan guaranty regulations
• Blue Water Navy Vietnam Veterans Act of 2019, Pub. L. 116-23 (eliminated VA loan limits for full-entitlement veterans).
• VA Form 26-1880 — Request for a Certificate of Eligibility.

VetDisabilityCalc is an independent reference site. We are not VA-accredited and we do not prepare or present VA claims, and we are not a mortgage lender. This guide is reference material and is not legal, financial, or mortgage advice.