The Quick Read: A service-connected disability rating changes the funding fee, not the cash-out rules. Veterans who receive VA disability compensation are exempt from the fee, per VA’s funding fee page. Everything else stays the same for every borrower: appraised value, seasoning, net tangible benefit, income and credit. Rating or no rating, the file has to clear each of them.
Key Takeaways
- The exemption depends on receiving compensation, not on a rating tier.
- Cash-out reaches up to 100% of appraised value, including a financed fee.
- Seasoning and net tangible benefit apply to every borrower.
- A pending claim generally does not exempt the fee at closing.
- Residual income is the controlling underwriting test.
What Does a Disability Rating Change on a VA Cash-Out?
The rating changes one line on the closing paperwork: the funding fee. That is the whole mechanical effect. It may also help income qualification, since compensation is stable income, but it does not touch the loan-to-value ceiling, the seasoning test or the benefit test.
Across the wholesale programs Lendmire places VA files with, the pattern is the same. Veterans assume a high rating unlocks more cash or looser rules. It doesn’t. The VA cash-out refinance program treats a veteran with a low disability rating and a veteran with the highest rating identically on everything except the fee and the income picture.
Key Terms Defined
- Certificate of Eligibility (COE): the VA document that confirms service eligibility and shows funding fee status.
- Funding fee: a one-time VA charge on most VA loans, which can be financed into the loan.
- Seasoning: the minimum payment history required on the loan you are refinancing.
- Net tangible benefit: a required test showing the new loan actually improves your position.
- Residual income: money left each month after debts, taxes and living costs, measured against a VA table.
- Reasonable value: the value VA sets through its appraisal, which caps the new loan.
How Does the VA Funding Fee Work for a Rated Veteran?
The fee is a one-time charge. VA says it exists because the program has no down payment and no monthly mortgage insurance. It can be financed or paid at closing.
For a non-exempt borrower on a cash-out refinance, the fee is 2.15% on first use and 3.3% after that. Those are the figures across the programs Lendmire works with, subject to lender guidelines. A veteran receiving compensation pays zero. On a financed fee, the exempt borrower also avoids the extra balance that carries interest.
There is a second effect on cash. The regulation lets the fee be rolled into the new loan, but any part that would push the loan past 100% of reasonable value has to be paid in cash at closing. An exempt borrower does not give up any of that ceiling to the fee. That is the cash-out advantage.
Who Else Is Exempt?
Compensation recipients are the main group. The other exempt categories are narrow:
- Veterans who would receive compensation but take retirement or active-duty pay instead.
- Active-duty Purple Heart recipients.
- Surviving spouses receiving Dependency and Indemnity Compensation.
- Service members with a proposed or memorandum pre-discharge rating.
The COE is what decides it. It will show exempt, non-exempt, or a note to contact the regional loan center. Pull it early.
How Is a VA Cash-Out Underwritten, Step by Step?
The steps are the same for every borrower. A rating only changes step one and step three.
1. Confirm eligibility and fee status. The lender pulls the COE. If it says non-exempt and you receive compensation, fix that before anything else.
2. Check seasoning. Under VA Circular 26-19-05, the first payment on the loan being refinanced must be at least 210 days before closing, and six monthly payments must have been made.
3. Qualify the borrower. Loan terms must bear a proper relationship to present and expected income and expenses, and credit must be satisfactory. Residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table. Disability compensation is typically documented with an award letter. How a lender grosses it up for ratios is a lender-specific choice.
4. Appraise. VA sets the reasonable value, and under 38 CFR 36.4306 that value caps the new loan at 100%.
5. Run the net tangible benefit test. The lender must give you a comparison of the new loan against the old one.
6. Close. The fee is financed or paid in cash. For an exempt veteran, that line should read zero.
What Is the Net Tangible Benefit Test?
It is a required showing that the new loan helps you. The regulation lists several ways to pass:
- A lower payment.
- A shorter term.
- A lower interest rate.
- Eliminating monthly mortgage insurance.
- Higher monthly residual income.
- Refinancing an interim construction or repair loan.
- A new loan at or under 90% of reasonable value.
- Converting an adjustable-rate loan to fixed.
A cash-out often passes through a different door than a rate refinance. If you take cash, the payment usually rises, so the file leans on one of the other options. That is where files stall. The test also has a fee-recoupment piece. Ask the lender how it is measured on your file.
How Much Cash Can You Take Out?
Up to 100% of the appraised value, including the financed fee, on the wholesale programs Lendmire places with. That is the ceiling in the regulation too. The cash-out can refinance any loan type into VA, not just an existing VA loan.
Some lenders set a lower cap than VA does. The ceiling is a VA rule. A lower cap is a lender overlay. If one lender quotes you a lower number than the regulation allows, that is a reason to compare programs, not evidence that VA limits you.
On credit, VA sets no minimum score. The wholesale programs Lendmire works with start at a 580 decision score, and some lenders set a higher floor. Full-entitlement loans have no VA loan limit, and the wholesale programs serve amounts to $4,000,000. With remaining entitlement, a down payment may be required, so speak with a loan officer.
Exemption and Rating: Where the General Rule Breaks
Exemption not verified before closing. If the COE is wrong at closing, the fee may get charged. VA’s funding fee page describes a refund route through the regional loan center, with limits. Read the page itself for the exact terms and the current contact details rather than relying on a summary.
Pending claim. A claim without a rating or a proposed rating generally does not exempt you at closing. Get the decision first when you can.
Rating percentage. The exemption turns on receiving compensation, not on a tier. If a low rating raises any question about whether the exemption applies, confirm with the COE.
Construction-to-permanent loans. The circular treats these as cash-out refinances regardless of any change in principal.
IRRRL. The streamline is a separate program. It carries a 0.5% fee unless exempt, involves no cash back, and is excluded from the cash-out seasoning rule in the circular’s wording.
Prepayment penalties. A refinancing loan may include contractual prepayment penalties owed to the old lender, per Cornell’s Legal Information Institute.
Occupancy. The regulation addresses homes occupied by the veteran or a spouse. Treat this as a primary-residence program.
Rated Versus Unrated: A Side-by-Side
Take two veterans with the same home, the same equity and the same balance. One receives compensation. One does not.
| Item | Rated (compensation) | Unrated |
|---|---|---|
| Funding fee | Waived | 2.15% first use, 3.3% after |
| Appraisal ceiling | 100% of value | 100% of value |
| Seasoning | Same test | Same test |
| Net tangible benefit | Same test | Same test |
| Fee eating into ceiling | None | Fee counts toward 100% |
The rated veteran keeps more of the ceiling as cash and a smaller balance. Nothing else moves.
What Documents Should You Gather?
- Your COE, checked for exempt status.
- The VA award letter showing compensation.
- Mortgage statements proving the payment history.
- Income documents for any non-VA income.
- Homeowners insurance and the current payoff information.
A clean COE and an award letter that match are the two items that most often prevent a late correction.
What Should You Do Next?
Pull the COE first. If it shows compensation but says non-exempt, start the correction before you apply. Then check seasoning against your first payment date, and decide which benefit test your goal fits. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
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
Do I need a high disability rating to skip the funding fee?
No. The exemption turns on receiving VA compensation, not on a rating tier. The COE shows your status, so check it before you apply.
Does a pending disability claim exempt me at closing?
Generally not. A claim with no rating or proposed rating does not exempt the fee. Getting the decision first is the cleaner path. A proposed or memorandum pre-discharge rating is a separate case.
Can I take out 100% of my home’s value?
Yes, on the programs Lendmire places with, up to 100% of appraised value including a financed fee, subject to lender guidelines. Some lenders cap lower. That is their overlay, not VA’s rule.
Does the rating change my seasoning or benefit test?
No. The 210-day and six-payment seasoning test and the net tangible benefit test apply to every borrower. The rating changes the fee and may help the income picture.
What if my COE shows non-exempt but I receive compensation?
Raise it with the regional loan center and the lender before closing. VA’s page lists a refund route and its limits, so read it directly rather than assuming a refund.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. VA funding fee and closing costs
4. Cornell Legal Information Institute, 38 CFR 36.4306
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 Much a Disability Rating Changes Your VA Cash-Out Payment and Cash · VA Cash-Out Seasoning Requirements for an Existing VA Loan · VA Cash-Out Refinance Requirements for Cap, Seasoning and Fees
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.