The Quick Read: Yes, when you are receiving VA disability compensation, the funding fee cannot be collected on a cash-out refinance. What exempts you is the compensation itself, not the paper rating, and the statute sets no minimum percentage. Status has to be verified before closing, so the paperwork matters as much as the rule.
If you hold a rating but no compensation is being paid, or your claim is still pending, the answer changes. The sections below cover who qualifies, how to confirm it, and what to do when the facts are messy.
Does a Disability Rating Exempt You From the Cash-Out Fee?
Yes, if you are receiving compensation for a service-connected disability. The rule is federal law, not a lender favor. Under 38 U.S.C. § 3729, no funding fee may be collected from a veteran who is receiving compensation. The same text is published by the Government Publishing Office.
Two points trip people up.
There is no percentage floor. Many consumer articles say “10% or higher.” That is shorthand. The statute turns on whether compensation is being paid. A veteran rated at 10% and paid is exempt in the same way as a veteran rated at 100%.
The exemption covers cash-out loans. The waiver is not limited to purchases. It applies to housing loans under the VA program generally, so a VA cash-out refinance, a streamline and a purchase all qualify for the same waiver.
Across the wholesale programs Lendmire places VA files with, the fee line is one of the first things checked on an exempt borrower’s file. When status is confirmed, the line shows zero. When it isn’t, the fee is built into the loan like any other financed charge.
What the Fee Looks Like When You Aren’t Exempt
For contrast, the non-exempt cash-out fee is 2.15% for first use and 3.3% for subsequent use, per VA Circular 26-23-06, Exhibit B. Those schedules run through a sunset date set by law, which is a detail worth confirming with the VA.
The fee is a percentage of the loan amount, and it can be financed into the loan. On a VA cash-out refinance, which can reach 100% of the appraised value including the financed fee, that matters. A non-exempt borrower who finances the fee ends up with a bigger loan balance and less room in the equity. An exempt borrower avoids both effects.
Put plainly: the exemption doesn’t change whether you qualify. It changes what the loan costs you to carry and how much equity the loan consumes.
Which Situations Count as Exempt?
Receiving compensation is the core test, but the statute names several other groups. Here is how common situations sort out.
| Situation | Exempt? | What the lender needs |
|---|---|---|
| Rated and receiving compensation | Yes | Award letter, COE confirmation |
| Entitled to compensation but paid retirement pay instead | Yes | Award letter showing entitlement |
| Pre-discharge or memorandum rating | Yes, if dated before closing | Rating document, VA verification |
| Claim still pending at closing | No | Fee is charged unless status is verified |
| Surviving spouse receiving DIC | Yes | DIC award documentation |
| Active-duty Purple Heart, evidence by closing | Yes | Proof of the award |
| Purple Heart veteran, no other basis | No | Not exempt on that basis alone |
| 0% rating with no payment | Generally no | Confirm with VA |
A few notes on the edge cases.
Retirement pay. A veteran who would be entitled to compensation but receives retirement or active-service pay instead is still exempt. The statute says so directly.
A 0% rating. The test is receiving compensation, and a 0% rating generally carries no payment. That points toward not exempt. Because the question can turn on individual VA records, confirm it with the VA before counting on a waiver.
Purple Heart. The statute names active-duty members who give evidence of the award on or before closing. A veteran who holds a Purple Heart but receives no compensation and has no other basis is not exempt.
Surviving spouses. Spouses of veterans who died in service or from a service-connected disability are exempt. In practice that usually means the spouse is receiving Dependency and Indemnity Compensation.
How Do You Confirm You’re Exempt Before You Close?
Confirm it early, in writing, and check it again on the loan documents. The VA decides eligibility through the certificate of eligibility (COE), and exempt status should appear there or be confirmed through VA records.
A practical order of operations:
1. Get your COE. Your lender can request it, or you can pull it yourself through VA. Look at the funding fee status shown.
2. Gather your VA award letter. It shows that compensation is being paid. Lenders typically ask for it to match against VA records.
3. Ask the loan officer to confirm exempt status in the file. Do this before the appraisal is ordered, not at the end.
4. Read the Loan Estimate. The funding fee line should be zero. If it isn’t, ask why right away.
5. Read the Closing Disclosure. It repeats the line. Compare the two.
6. Re-verify on every VA loan. Exempt status is checked each time you use the benefit. It doesn’t carry over automatically.
Here is the catch. If exempt status can’t be verified before closing, the fee has to be collected as though you weren’t exempt. Lenders are also told not to steer veterans toward closing and sorting out a refund afterward. A zero on the Loan Estimate is a good sign, but the verification behind it is what counts.
A Cash-Out With and Without the Exemption
Run the comparison without dollar figures. Picture a veteran with a first-use cash-out refinance who borrows up to the program’s 100% of appraised value, including the financed fee.
- Not exempt: the 2.15% fee is added on top of the base loan amount. The borrower’s total balance is higher, and the fee eats into the equity available to take out as cash or to leave in the home.
- Exempt: the fee line is zero. The same appraised value supports the same borrowing, but none of it is consumed by the fee. The balance is lower, so the monthly obligation is slightly lower too.
For a subsequent-use borrower the gap is larger, because the non-exempt figure is 3.3%. The exemption removes the whole charge either way.
What the exemption does not change: the full VA appraisal, income and credit underwriting, and the usual third-party closing costs. Appraisal, title and recording charges still apply. The exemption affects one line, though it is the largest VA-specific line.
If you’re weighing how the fee and the rest of the program fit together, the rules on first or subsequent use of the funding fee explain how the tiers sort out.
Cash-Out, Purchase and Streamline: Same Exemption, Different Loans
The waiver is the same across VA loan types. What changes is the loan itself.
| Feature | Cash-Out Refinance | Streamline (IRRRL) | Purchase |
|---|---|---|---|
| Exemption applies | Yes | Yes | Yes |
| Non-exempt fee | 2.15% first use, 3.3% after | 0.5% | Varies by down payment and use |
| VA appraisal | Yes | No | Yes |
| Takes equity out | Yes | No | No |
| Refinances non-VA loans | Yes | No (existing VA loan only) | Not applicable |
Refinancing a non-VA loan, such as an FHA loan, into a VA loan is treated as a cash-out refinance for fee purposes. The VA cash-out also carries seasoning and a net tangible benefit test. If you already hold a VA loan and only want a different rate or a switch from adjustable to fixed, the streamline is the simpler product. The cash-out is the one to use when you want equity or need to move out of a non-VA loan.
Details on the program itself are on Lendmire’s VA cash-out refinance program page.
Your Claim Is Pending: Close Now or Wait?
It depends on what you need the cash for and how firm the effective date looks. A pending claim does not exempt you. Without a rating on record, the fee is charged at closing.
Waiting makes sense if the decision is close, the cash isn’t urgent, and the fee on your loan would be meaningful. Closing after the rating is on record means the fee line can be zero from the start.
Closing now makes sense if you need the funds on a set schedule or your current loan is costing you more every month you hold it. The trade-off is real. You pay the fee and rely on a later refund.
A refund is possible only when compensation is later awarded with an effective date before your closing. VA’s General Counsel concluded that the law requires refunds based on retroactive award dates (VAOPGCPREC 2-2019). If the effective date falls after closing, there’s no refund right.
Honestly, this is a judgment call, not a formula. Nobody can promise a claim’s outcome or its effective date. Planning around a refund is a bet on both.
Active-duty members have a narrower path. A proposed or memorandum rating dated before closing can support the exemption, and the lender requests it from VA. A rating dated after closing does not create a refund right.
If You Were Charged and Shouldn’t Have Been
Start with the paperwork. A refund is not automatic. The veteran typically has to ask, and the request is built on the award letter showing the effective date and the Closing Disclosure showing the fee paid.
A sensible sequence:
1. Compare the award letter’s effective date to your closing date.
2. If the effective date is earlier, gather the award letter and the Closing Disclosure.
3. Ask your lender how it handles refund requests, and whether it will submit one.
4. If that stalls, contact VA directly with the same documents.
Joint loans add a wrinkle. Fee treatment depends on which borrower is the veteran, so ask the lender how it applies to your file.
What the Exemption Does Not Remove
It does not erase closing costs. Appraisal, title, recording and lender charges still apply, and the exemption does nothing to them. It also doesn’t loosen underwriting. Residual income remains the controlling test. The 41% debt-to-income figure is a guideline, not a cap, but a ratio above it needs residual income well above the table. Pricing and available terms vary by lender, borrower profile, property type, and full underwriting review.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Common Myths
“You need a 10% rating.” No. The statute has no threshold. The test is receiving compensation.
“A rating on paper is enough.” Not by itself. Compensation has to be paid, or you must fall into one of the other named groups.
“I’ll close now and get it refunded later.” Only works if the effective date lands before closing, and lenders are told not to build a plan around it.
“The exemption means no closing costs.” It only removes the funding fee.
“The fee goes to the lender.” It goes to VA to help fund the program.
“Everyone with a Purple Heart is exempt.” Only active-duty members with evidence by closing, under the statute.
Key Terms Defined
Funding fee: a one-time charge on VA loans, paid to VA and usually financed into the loan, that exempt borrowers don’t pay.
Certificate of Eligibility (COE): the VA document that confirms you qualify for the program and shows your fee status.
Effective date: the date VA sets for when a compensation award begins, which can be earlier than the date of the decision.
Residual income: the money left each month after debts and living costs, which is the controlling VA underwriting test.
Net tangible benefit: the requirement that a refinance leave the borrower measurably better off.
Before-You-Apply Checklist
- Confirm you’re receiving compensation, not just holding a rating.
- Pull your COE and read the fee status.
- Have your award letter ready.
- Ask the lender to verify exempt status before the appraisal.
- Check the fee line on both the Loan Estimate and the Closing Disclosure.
- If your claim is pending, decide deliberately whether to wait.
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. All program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Does a 10% disability rating exempt me from the cash-out fee?
Yes, if you’re being paid compensation. The statute has no minimum percentage, so a 10% rating and a 100% rating are treated the same for the fee. The thing to verify is that compensation is actually being paid, which your award letter shows.
Does the exemption apply to a cash-out refinance, or just a purchase?
It applies to both. The waiver covers housing loans under the VA program, including purchase loans, streamlines and cash-out refinances. For a cash-out, that means the 2.15% first-use or 3.3% subsequent-use fee doesn’t get added to your balance.
What if my disability claim is still pending when I close?
The fee is charged. A pending claim does not exempt you. If compensation is later awarded with an effective date before your closing, a refund may be available, but you have to request it and the effective date has to fall before closing.
Do I have to prove my status every time I use a VA loan?
Yes. Status is verified each time, typically through the COE and your award letter. Don’t assume a prior loan’s exemption carries forward.
Does being exempt mean I skip the appraisal and other closing costs?
No. A cash-out still needs a full VA appraisal and full income and credit underwriting, and the usual third-party charges apply. The exemption removes only the funding fee.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
3. VA Circular 26-23-06, Exhibit B
4. VA General Counsel Opinion VAOPGCPREC 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: VA IRRRL Vs VA Cash-out: Choosing The Right VA Refinance · VA Cash-out Refinance To Pay Off A Non-va Loan: Type I Vs Type II Explained · VA Cash-out Refinance: How The 100 Percent Ceiling Really Works
Brandon Miller
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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.