The Quick Read: A pending disability claim does not make you exempt from the funding fee at closing. If VA’s records do not show your exemption before the loan closes, the fee is collected as if you were non-exempt. You may get a refund later, but only if your award’s effective date falls before your closing date.
Most of the confusion comes from one word: “pending.” Pending means VA has not decided yet. The exemption belongs to people who are receiving compensation, or who fit another exempt group, on the day the loan closes. Everything below follows from that one timing rule.
What Is the Funding Fee, and Who Skips It?
The funding fee is a one-time charge paid to VA on most VA-backed loans. It helps keep the program running without monthly mortgage insurance. On a cash-out refinance, the fee is 2.15% of the loan amount for first use of the benefit and 3.3% after first use. Per VA.gov, those cash-out tiers do not change with a down payment. A borrower whose only earlier VA use was a manufactured home still pays the first-use tier.
Exempt groups, per VA News, include:
- Veterans receiving VA compensation for a service-connected disability.
- People eligible for compensation who receive retirement or active-duty pay instead.
- Surviving spouses receiving dependency and indemnity compensation.
- Service members with a proposed or memorandum rating issued before closing, based on a pre-discharge claim.
- Active-duty Purple Heart recipients who give evidence on or before closing.
Two points surprise people. First, no minimum rating percentage is stated in VA’s rules. The test is whether you are receiving compensation. Second, exemption is checked fresh on every loan, not carried over from the last one.
What Does “Pending” Mean at Closing?
Pending means not exempt yet. VA will determine the borrower’s status and refund the fee if appropriate.
Here is how the common myths hold up:
| Belief | Reality |
|---|---|
| A pending claim exempts me | No. The fee is collected at closing |
| A rating decision after closing is enough | No. The effective date is what counts |
| A proposed rating after closing helps | No. The fee is still owed |
| The refund lowers my loan balance | No. It is paid to you directly |
| I need a high rating | The test is receiving compensation |
How Is Exemption Verified Before Closing?
Verification runs through your Certificate of Eligibility, or COE. The COE is the VA document that shows your eligibility and, for most borrowers, your funding fee status. It reads exempt, non-exempt, or a note to contact the regional loan center.
Here is the sequence a careful file follows:
1. Pull the COE early. VA guidance for lenders says exemption information appears on the COE.
2. Ask about pending claims. If the COE says “Non-Exempt,” the lender is supposed to ask whether a compensation claim is pending.
3. Request an updated COE. If you say a claim is pending, the lender should ask VA for an updated COE before closing.
4. Bring your paperwork. An award letter showing current compensation is the document that usually resolves a stale COE.
VA’s own lender circular says lenders must confirm exemption status before closing and use due diligence. They cannot ignore information suggesting an exemption might apply. In practice, this works best when you raise the pending claim on day one, not at the closing table.
The “Close Now, Refund Later” Trap
Here is the catch. VA’s circular tells lenders not to advise a possibly exempt borrower to finance the fee and collect a refund as effective cash back after closing. VA raised that concern because some borrowers were reportedly steered that way.
A refund is a safety net, not a plan. It works only under one condition, covered next.
How Does a Refund Work?
A refund is possible only when your compensation is awarded later with an effective date before your closing date. VA’s Loan Fees page says a refund may be due if a claim was pending at closing and compensation was later awarded retroactive to a date before closing.
The effective date is the date VA assigns as the start of your benefit. It is not always the date of the decision letter. A decision can arrive months after closing yet carry an effective date that reaches back before it. The date VA collects the fee is the key event, and VA’s General Counsel precedent opinion discusses how retroactive awards bear on whether someone was “receiving compensation” at closing.
Here is how the main situations come out:
| Situation | Fee at closing | Refund possible? |
|---|---|---|
| Already receiving compensation, COE shows exempt | Waived | Not needed |
| Pending; later award effective before closing | Collected | Yes |
| Pending; later award effective after closing | Collected | No, not on that award |
| Claim denied | Collected | No |
| Active duty; proposed rating before closing | Waived | Not needed |
| Active duty; no proposed rating by closing | Collected | No |
| Proposed rating issued after closing | Collected | No |
To ask for a refund, contact your mortgage holder or the VA Regional Loan Center. VA’s Loan Fees page, linked above, lists how to reach the center. VA decides refund eligibility because the fee is paid to VA. For refunds issued on or after July 1, 2019, VA pays the refund directly to the Veteran, whatever the loan balance. It is not applied to your loan. You may choose to send it to your servicer to reduce principal, and that is your call.
Keep your award letter, which shows the effective date, and your Closing Disclosure. These two documents are the most direct support for a refund request.
What Happens to a Financed Fee on a Cash-Out?
On a cash-out refinance, the fee is a percentage of the loan amount, and it can be financed. Across the wholesale VA programs Lendmire places files with, the cash-out loan can reach 100% of the appraised value including the financed fee. It can refinance any loan type into VA, and it carries seasoning and a net tangible benefit requirement. Seasoning is the waiting period before you can refinance. Net tangible benefit means the refinance has to improve your position in a real way. All of this is subject to lender guidelines and full file review.
Financing the fee has three effects:
- It raises the new loan balance.
- It raises the payment.
- It leaves less equity in the home.
Because the fee is tied to the loan amount, an exemption shrinks the final balance. The funding fee does not change the appraisal or VA’s value determination. Appraisal and credit report costs you have already incurred are generally not refunded if the loan does not close.
Say you finance a non-exempt fee, then win a retroactive award. You get a refund in cash, but your balance stays where closing set it. The household then decides whether to put that money toward principal.
Close Now or Wait for the Rating?
This is a real tradeoff, and it belongs to you. A refinancer controls the closing date. A purchase buyer under contract usually cannot.
Closing now makes sense when the cash need is real and the fee, at 2.15% or 3.3%, is an acceptable cost. Waiting makes sense when a rating decision looks close and the equity matters more than the timing. No one can promise how a pending claim will come out, or when. A rating could also come back lower than expected, or be denied, and then no exemption applies.
If the claim is already close to a decision, ask your lender to request an updated COE before you set a closing date. Also keep in mind the effective date: even a later decision can reach back before closing, which is exactly why a refund may be available.
Edge Cases Where the General Rule Bends
- 0% rating. The test is receiving compensation. A rating on file without compensation payable is a different question, and you should raise it with your lender and VA.
- Pending increase while already exempt. If your COE already shows exempt, the pending increase does not change that.
- Retirement pay instead of compensation. You may still be exempt if you would be entitled to compensation but for that pay.
- Active-duty pre-discharge claims. You need a proposed or memorandum rating issued before closing. The pre-discharge circular, VA Circular 26-23-19, lists this exemption.
- Purple Heart. This applies to active-duty members who provide evidence on or before closing.
- Other VA loans. The IRRRL, VA’s streamline refinance, carries a 0.5% fee unless you are exempt. The same verify-before-closing logic applies.
- Surviving spouses. Those receiving dependency compensation are exempt, and the same COE check applies.
The rules sit in federal regulation, 38 CFR 36.4313, which limits the charges a lender can make against the borrower on a VA-guaranteed loan.
Questions to Ask Your Lender
- What does my COE show for funding fee status today?
- Will you request an updated COE before closing if my claim is pending?
- What does my balance look like with the fee financed and with it waived?
- If I close now, how will I document a possible refund?
- Does waiting a little longer change my options?
Keep the rest of the cash-out picture in view too. Residual income is the controlling underwriting test on VA loans. That is the money left each month after major obligations. The 41% debt-to-income figure is a guideline, not a cap. The wholesale programs Lendmire places VA loans with start at a 580 decision score, and VA itself sets no minimum.
Key Terms Defined
Funding fee: a one-time charge paid to VA on most VA-backed loans, which can be financed.
Certificate of Eligibility (COE): the VA document that shows your eligibility and funding fee status.
Effective date: the date VA assigns as the start of your compensation, which can be earlier than the decision date.
Proposed or memorandum rating: a pre-discharge rating for active-duty members that can create an exemption if issued before closing.
Seasoning: the waiting period before a loan can be refinanced.
Frequently Asked Questions
Does a pending VA disability claim waive the funding fee on a cash-out refinance?
No. If the claim is pending at closing, the fee is collected as if you were not exempt. You may be able to recover it later if the award’s effective date is before your closing date.
What if my rating letter arrives after closing?
The decision date matters less than the effective date. If the effective date falls before closing, you may qualify for a refund. If it falls after closing, no refund comes from that award.
Does the refund reduce my mortgage balance?
No. For refunds issued on or after July 1, 2019, VA pays the Veteran directly. You can choose to send it to your servicer to apply to principal.
Do I need a minimum disability percentage to be exempt?
VA’s published rules turn on receiving compensation, not on a percentage. Ask your lender and VA how a specific rating applies to your file.
Can an active-duty service member avoid the fee with a pre-discharge claim?
Yes, if a proposed or memorandum rating is issued before closing. Without it, the fee is collected and no refund follows.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Details of the VA cash-out refinance program are subject to lender guidelines and full file review, and nothing here is a commitment to lend. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. VA.gov: Funding fee and closing costs
2. VA News: Funding fee, who pays and who is exempt
5. VA General Counsel Precedent Opinion 2-2019
This article is part of Lendmire’s VA Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: How to Check Entitlement and Get Your COE Before a VA Cash-Out · Does a Disability Rating Exempt You From the VA Cash-Out Fee? · How Much a VA Cash-Out Funding Fee Adds to Your Monthly Payment
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.