The Quick Read: A disability rating changes two things on a VA cash-out: how your income is documented and whether the funding fee applies. It changes neither on a conventional cash-out, where the award is treated as income and nothing more. The VA route is usually built for veterans who want the most equity access and a fee waiver. The conventional route fits borrowers with a smaller balance, strong credit and a wish to stay out of the VA system.
Neither loan treats the rating as a ticket to approval. Credit, income, residual income and the appraisal still decide the file on both sides. Program figures below are subject to lender guidelines and full file review, and none of this is a commitment to lend.
Side-by-Side
| Factor | VA cash-out | Conventional cash-out |
|---|---|---|
| Maximum leverage | Up to 100% of appraised value, financed fee included | Lower cap, set by agency eligibility tables |
| Credit floor | 580 decision score on the wholesale programs Lendmire uses | Typically higher, set by the lender and automated findings |
| Mortgage insurance | None | Typically required above a lower leverage level |
| Funding fee | 2.15% first use, 3.3% after; waived if exempt | None |
| Occupancy | Primary residence | Primary, second home or investment, with different limits |
| Disability income | Shown on the COE, no continuance proof | Award letter or bank statement, no minimum history |
| Controlling test | Residual income | Debt-to-income and automated findings |
How the Rating Shows Up in Each File
On a VA file, the certificate of eligibility (COE) carries the weight. VA Pamphlet 26-7, Chapter 4 says the COE shows your entitlement, your funding-fee exempt or non-exempt status and your monthly VA disability amount. The underwriter reads that line and moves on. VA disability income does not need continuance documentation either, so no one is asking whether the payments will last three years.
On a conventional file, the rating itself never appears. The lender documents the dollar amount. Under Fannie Mae’s guide on VA benefits income, that can be an award letter, a benefit statement, a bank statement, a signed tax return or a 1099, plus evidence of at least one payment. No minimum history is required, and the three-year continuance test is waived for long-term disability benefits. Education benefits do not count as income.
So both programs accept the income. The difference is what the rating buys you beyond income.
Where the Rating Matters Most: The Funding Fee
The funding fee is the biggest practical gap. On a VA cash-out, the fee is 2.15% on first use and 3.3% after that. It can be financed into the loan. Veterans receiving compensation for a service-connected disability are exempt, and so are a few other groups. VA News lists the exempt categories, including service members with a proposed or memorandum rating from a pre-discharge claim, and says more than half of Veterans with a VA-guaranteed loan since 2021 were exempt.
Conventional loans have no funding fee, and the rating buys no exemption from any other charge. The Fannie Mae pages never mention a waiver. That is the most common misconception on these files: the waiver is a VA program feature, not a benefit that follows you into a different loan.
The exemption is also not automatic. Status has to be verified, usually on the COE. Describe your rating as a compensable service-connected rating. The sources reviewed do not set a minimum percentage, so do not assume one.
When VA Cash-Out Is the Better Fit
VA tends to win in four situations.
1. You want the most equity. The VA cash-out reaches 100% of the appraised value, financed fee included. Conventional cash-out stops well short of that.
2. You are exempt from the fee. With the fee waived, the biggest VA cost disappears, and there is no monthly mortgage insurance on top of it.
3. Your current loan is not a VA loan. A VA cash-out can pay off any loan type, so it converts a conventional mortgage into a VA loan. VA’s quick reference guide notes this type of refinance needs at least one net tangible benefit, and the VA-to-VA seasoning rule does not attach to it.
4. Credit is thin. The wholesale programs Lendmire places VA loans with start at a 580 decision score. That is lower than most conventional files will tolerate.
Residual income is the controlling VA test. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table, which is where steady disability pay helps. For program details, see Lendmire’s VA cash-out refinance program.
The VA tests you must clear are real. Net tangible benefit is one. Seasoning is another: the later of 210 days from the first payment and the sixth payment, on a VA-to-VA refinance. VA’s conference materials add that some refinances also need recoupment of fees, and that seasoning may apply to both cash-out types. Expect initial and final cash-out compliance disclosures too. Files that skip these get kicked back.
When Conventional Cash-Out Is the Better Fit
Conventional is the stronger choice in these cases.
1. The home is not your primary residence. VA cash-out is for the home you live in. Conventional has separate limits for second homes and multi-unit properties. Occupancy decides leverage.
2. You are borrowing a modest amount against large equity. Low leverage on a conventional loan can avoid mortgage insurance, and there is no funding fee to finance.
3. Your credit is strong and your score clears conventional cutoffs easily. The VA’s credit flexibility is worth less to you.
4. You want to keep VA entitlement untouched. Some borrowers prefer not to use entitlement on a refinance.
5. A recent purchase is the issue. Fannie Mae’s cash-out policy includes a delayed financing exception for a property bought within the past six months, if the purchase was arm’s-length and other conditions are met.
Conventional files also have a quirk. Fannie Mae’s eligibility matrix sets minimum reserves for cash-out casefiles run through automated underwriting when the debt-to-income ratio is above 45%. Reserves documentation is one more line the VA file does not carry the same way.
Scenarios
High rating, strong equity, VA loan already in place. VA cash-out is the cleaner path. The fee is waived, leverage can reach 100%, and the income sits on the COE. Plan for seasoning and net tangible benefit.
Lower rating, heavy debt load. The rating still counts as income on both sides, but it will not fix a weak ratio. VA’s residual-income test is more forgiving of a high ratio when the cushion is there. Conventional leans harder on debt-to-income.
Pending claim. Income cannot be placed on the COE until the monthly award starts. An awards letter can verify the amount and start date of a future award, and the COE may later show exemption. If exempt status cannot be verified before closing, the fee may have to be paid as if not exempt. Whether a refund follows is a question for VA, not a promise anyone can make at the table.
Conventional loan, VA eligible. Moving to VA avoids the VA-to-VA seasoning rule. It also drops monthly mortgage insurance if the conventional loan carries it.
Documentation Checklist
- Certificate of eligibility showing entitlement and fee status.
- VA award or benefit letter, or bank statements showing deposits.
- VA Form 26-8937 when the COE says to verify with VA.
- Payoff statement for the existing loan.
- Evidence of hazard coverage, plus an appraisal on either loan.
- Reserves documentation on conventional files where the matrix calls for it.
Risks and What Can Change Mid-Process
Cash-out is not free money. VA warns that cash-out is typically added to the loan, which raises the balance and the interest paid over time. Allowable fees and costs can be paid from loan proceeds, which can reduce cash due at closing.
Watch the sales pitch too. The CFPB and VA have warned about unsolicited refinance offers that sound too good to be true. Compare the full loan, not one payment line. A rating review or reduction mid-file changes the documented income, so refresh the award letter before the file goes in.
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
Certificate of eligibility (COE): The VA document that shows entitlement, fee status and your monthly disability amount.
Funding fee: A one-time VA program charge, reviewable and waived for exempt veterans.
Net tangible benefit: A VA test that the refinance has to leave the borrower better off in a measurable way.
Seasoning: The required waiting period after your current loan begins before you can refinance it.
Residual income: The money left each month after major obligations, which VA treats as the controlling test.
Type I and Type II cash-out: VA’s labels for a refinance whose new loan does not exceed the payoff, or does exceed it.
The Verdict
Choose VA when you live in the home, want the most equity, and your rating makes you fee-exempt. Choose conventional when occupancy is not primary, when you borrow modestly against deep equity, or when strong credit makes the VA edge small. The rating helps with income on both. It waives a fee on one.
Frequently Asked Questions
Does a higher disability rating mean a bigger cash-out?
No. The rating drives fee exemption and income documentation, not the loan amount. Cash-out size depends on appraised value, leverage limits, credit and residual income.
Do I need a specific rating percentage to skip the funding fee?
The VA sources reviewed tie the exemption to receiving compensation for a service-connected disability and do not state a minimum percentage. Describe yours as a compensable rating and confirm exempt status on the COE.
Can I qualify on disability income alone?
Often it can carry a large share of the income, since both VA and conventional underwriting accept it. The file still has to clear credit, ratio and appraisal tests, subject to lender guidelines.
Does the fee waiver apply if I choose a conventional loan?
No. The waiver belongs to the VA program. Conventional loans have no funding fee to waive.
What if my claim is still pending at closing?
Income cannot go on the COE until the award starts, though an awards letter can show a future award. If exemption cannot be verified before closing, the fee may be charged and refund questions go to VA.
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.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
For current guidelines, see VA loan programs.
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References
1. VA Pamphlet 26-7, Chapter 4: Credit Underwriting
2. Fannie Mae Selling Guide B3-3.4-18: VA Benefits Income
3. VA News: Funding fee, who pays and who is exempt
4. VA Cash-Out Refinance Quick Reference
6. Fannie Mae Selling Guide B2-1.3-03: Cash-Out Refinance Transactions
7. VA News: You could be losing thousands on your home 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 Cash-Out Requirements for a New COE and Remaining Entitlement · VA Cash-Out Credit Score Requirements for Lender Overlays and LTV · How Much More Cash a VA Cash-Out Reaches Than Conventional
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.