The Quick Read: A veteran who receives VA disability compensation does not pay the VA funding fee on a cash-out refinance. Federal law sets this exemption, so no lender can grant it or deny it. The exemption also covers certain surviving spouses and active-duty Purple Heart recipients. What matters in practice is that your Certificate of Eligibility shows “Exempt” before you close.
This is about the federal VA funding fee on a home loan. It has nothing to do with state vehicle registration or state tax breaks for disabled veterans. Those are different programs.
Key Takeaways
- The test is receiving compensation (or being entitled to it), not hitting a specific disability percentage.
- The exemption applies to cash-out refinances, purchases, and streamline refinances alike.
- Your Certificate of Eligibility (COE) controls. If it says “Non-Exempt,” the file has to be fixed before closing.
- Closing and then asking for a refund is a risky plan. A refund works only in narrow cases.
- The exemption removes the funding fee. Appraisal, title, and other closing costs still apply.
What the Funding Fee Is, and What “Exempt” Means
The funding fee is a one-time charge VA collects on most VA-backed loans. It is a percentage of the loan amount. You can pay it in cash at closing or roll it into the loan.
On a cash-out refinance, the fee is the largest single charge most borrowers face. Across the wholesale programs Lendmire places VA files with, it runs 2.15% of the loan for first-time use and 3.3% for subsequent use. The percentage applies to the whole new loan balance, not just the cash you take out. That is why the exemption matters so much here.
“Exempt” means VA collects nothing. The line on your closing figures should read zero. Your balance is smaller, interest does not accrue on the fee, and you keep more of your equity.
Who Qualifies for the Exemption?
Federal law lists the groups. 38 U.S.C. 3729 bars VA from collecting the fee from a veteran who receives compensation. It also covers a veteran who would be entitled to compensation but for receiving retirement pay or active service pay. The same section covers surviving spouses and active-duty Purple Heart recipients.
Here is how the categories line up:
| Who qualifies | Proof the lender looks for | Must exist by |
|---|---|---|
| Veteran receiving compensation | COE shows “Exempt” | Closing |
| Entitled to compensation, but takes retirement or active pay | COE status after VA review | Closing |
| Active-duty member with a pre-discharge rating | Proposed or memorandum rating | Before closing |
| Surviving spouse receiving DIC | COE showing exempt status | Closing |
| Active-duty Purple Heart recipient | Evidence of the award | On or before closing |
DIC stands for Dependency and Indemnity Compensation. It is a VA benefit paid to certain surviving spouses of veterans who died in service or from a service-connected disability.
The statute is what makes this a right, not a favor. VA Circular 26-23-19 tells lenders that every veteran pays the fee except those in these groups. No lender discretion enters into it. The compensation waiver also appears in the closing-expense rules of 38 CFR Part 36.
Is There a Minimum Disability Rating?
No. Neither the statute nor VA’s circular sets a minimum percentage. The test is whether you receive compensation, or would receive it but for retirement or active-duty pay.
You will see some websites say you need a 10% rating, or more. Others imply that only a high rating counts. Neither claim appears in the federal text. If a loan officer tells you otherwise, ask them to point to the rule.
The flip side matters too. Having a rating on paper is not enough by itself. VA’s system has to reflect it, and that brings us to the COE.
How Does the Exemption Work on a Cash-Out Refinance?
It works the same way it does on a purchase. It does not change how the loan is underwritten. It changes only whether a funding fee is added to the balance or charged at closing.
Here is what stays the same for an exempt borrower, based on the wholesale programs Lendmire works with:
- The VA cash-out can reach 100% of the appraised value, including any financed funding fee.
- It can refinance any loan type into VA, not just an existing VA loan.
- Seasoning and a net tangible benefit still apply. Seasoning is the waiting period since your current loan began. A net tangible benefit means the refinance has to leave you better off in a way the program recognizes.
- Residual income is the controlling test. That is the money left each month after your debts, taxes, and living costs. The 41% debt-to-income figure is a guideline, not a cap. A higher ratio needs residual income well above the table.
- A VA appraisal is still required, and it is a separate cost from the funding fee.
- A decision score of 580 is where the wholesale programs we use begin. Each lender sets its own floor, and all of this is subject to lender guidelines and full file review.
Picture a veteran with a first-use cash-out who is taking the loan to 100% of the appraised value. A non-exempt borrower would see 2.15% of that loan added on top. An exempt borrower sees none. The balance stays lower, and more of the equity stays with you. That is the whole difference, and it is a big one.
If you want the program overview first, Lendmire’s VA cash-out refinance program page lays out the structure.
Step by Step: How to Claim the Exemption
Think of this as a sequence by timing. Start early.
1. Get your award letter. This is your VA benefit summary showing you receive compensation. Keep a copy handy, even though the COE is what the lender relies on.
2. Have the lender pull your COE. VA added funding fee status to the COE years ago. VA tells lenders and servicers to rely on that status as evidence of exemption.
3. Read the status line. If it says “Exempt,” you are in good shape. The lender should keep that documentation in the file.
4. If it says “Non-Exempt” and you believe you are exempt, flag it right away. The lender submits VA Form 26-8937, Verification of VA Benefits, to the VA Regional Loan Center. VA reviews your records and reissues the COE.
5. Check your Loan Estimate and Closing Disclosure. These are the two federal forms that list your loan costs. Look for the funding fee line. It should show zero.
6. Do not close until the status is settled. VA has told lenders not to advise veterans who think they are exempt to close first and sort it out later.
That last point deserves emphasis. VA’s guidance says status should be established before closing. If it cannot be verified in time, the fee is handled as if you were not exempt. A refund after the fact is not a plan.
What If Your Claim Is Pending?
Timing decides the outcome. Here are the common situations:
| Your situation | What generally happens |
|---|---|
| Rating in place before closing | Exempt from the fee |
| Claim pending at closing | Treated as non-exempt unless status is verified |
| Rating awarded after closing, effective before closing | Refund possible |
| Rating awarded after closing, effective after closing | No refund |
The refund case depends on the effective date. If VA grants compensation retroactive to a date before your closing, you may be able to recover the fee. If the effective date falls after closing, you cannot.
This is the main reason to talk to your loan officer before you apply. A short delay to let a rating decision land can be worth far more than the delay costs. Whether to wait is a genuine toss-up for some borrowers, since waiting also has its own cost if you need the cash. That choice is yours to weigh with the facts in hand.
Special Situations Where the General Rule Bends
Retirement pay instead of compensation. Many veterans choose retirement pay and waive part of their compensation. You can still be exempt, because the law covers anyone entitled to compensation but for that pay.
Active-duty members with a pre-discharge claim. You are exempt only if VA has issued a proposed or memorandum rating before closing. While the request is processed, the COE can read “Non-Exempt – In Development.” If you close before discharge with no such rating, there is no exemption and no refund. VA says the time to issue a memorandum rating varies.
Purple Heart recipients. An active-duty member who provides evidence of the award by closing is exempt. No separate disability rating is needed.
Surviving spouses. The exemption requires DIC and a death in service or from a service-connected disability. Receiving DIC is the test.
Streamline refinances. The exemption applies to the streamline (IRRRL) too. VA’s guidance on how the status is confirmed for streamlines has changed over time. A streamline carries a 0.5% fee for non-exempt borrowers, so the saving is smaller there.
Co-borrowers. The federal text ties the exemption to the veteran’s status. A non-veteran spouse on the loan does not create a second exemption. Ask your loan officer how the file is structured if you are applying jointly.
Lender misconduct. VA has flagged concern about borrowers being advised to finance the fee in order to get cash back after closing. Be wary of any pitch built on that idea.
What If You Were Charged Anyway?
Start by checking whether you were truly exempt at closing. If you were, the correction goes through VA’s Funding Fee Payment System. The lender or servicer starts it. VA sends the refund directly to you, and the lender does not have to reduce your principal balance. If a lender paid the fee in error without charging you, the refund goes to the lender instead.
Your steps look like this:
- Gather your award letter and your COE.
- Show the lender the effective date of your compensation.
- Ask the lender or servicer, in writing, to open the correction.
- Keep a record of every request.
Financial hardship is not a basis for waiver. Only the statutory groups qualify.
What the Exemption Does Not Cover
The exemption removes one charge. It does not make the loan free to close. Appraisal, title, and other closing costs set by the lender still apply. Plenty of veterans assume “exempt” means “no closing costs,” and that mistake leads to surprises at the table.
Also, the funding fee can be included in the loan, as 38 U.S.C. 3729 allows. For an exempt borrower, there is nothing to include. That is one reason an exempt cash-out loan tends to leave a smaller balance than a similar non-exempt one.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Funding fee: A one-time VA charge, set as a percentage of the loan, that can be paid at closing or financed.
Certificate of Eligibility (COE): The VA document that confirms you can use the benefit and shows your funding fee status.
Residual income: The money left each month after major obligations. It is the controlling test on VA loans.
Seasoning: The required waiting period between an existing loan’s start and a refinance.
Net tangible benefit: A requirement that a refinance leaves the borrower better off in a way the program recognizes.
Form 26-8937: The form a lender submits to VA to verify benefits when the COE status looks wrong.
Frequently Asked Questions
Do I need a certain disability percentage to be exempt?
No percentage is required. The federal rules turn on receiving compensation, or being entitled to it. Some lender websites claim a minimum, but that number is not in the statute or in VA’s circular.
Does the exemption apply if I am refinancing out of a non-VA loan?
Yes. A VA cash-out can refinance any loan type into VA, and the exemption applies to the new VA loan whatever the old one was. The same underwriting, seasoning, and net tangible benefit rules still apply, subject to lender guidelines.
Can I close now and get a refund once my rating comes through?
Only in narrow cases. A refund is possible when VA makes your compensation effective on a date before closing. VA guidance discourages closing with a plan to request a refund, so settle your status first.
What if my COE says “Non-Exempt” but I receive compensation?
Tell your lender immediately. They submit Form 26-8937 to VA, which reviews your records and reissues the COE. Do not close until the status matches your benefits.
Does the exemption lower my other closing costs?
No. It removes only the funding fee. The VA appraisal, title charges, and lender-set costs still apply, and they are listed on your Loan Estimate and Closing Disclosure.
Next Step
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. Program figures here are subject to lender guidelines and full file review, and nothing here is a commitment to lend. For a veteran with a compensation award, the first move is simple: get the COE in front of the loan officer before anything else is signed.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For the program’s current guidelines, see VA loan programs.
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References
2. VA Circular 26-23-19, VA Funding Fee Exemption and Refund Procedures for Lenders
3. 38 CFR Part 36 (eCFR), VA loan guaranty regulations
4. 38 U.S.C. 3729, fee remitted before guaranty and may be included in the loan
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 vs Conventional Cash-Out Requirements With a Disability Rating · VA IRRRL vs VA Cash-Out Requirements for a High-DTI Veteran · VA IRRRL vs VA Cash-Out Requirements for a Fee-Exempt Veteran
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.