The Quick Read: A veteran who is verified as exempt pays no funding fee on a VA cash-out refinance. The exemption comes from federal law, not from a lender’s choice. It is tied to receiving VA disability compensation, and the Certificate of Eligibility (COE) and VA documentation prove it.
Key Takeaways
- The exemption is set by statute. A lender cannot grant it or waive it on its own.
- It depends on receiving compensation, not on a minimum rating percentage.
- Status must be settled before closing. A refund later is not guaranteed.
- Exempt status removes the fee only. Appraisal, residual income, net tangible benefit and other closing costs still apply.
What Is the Funding Fee, and Why Does Cash-Out Carry One?
The funding fee is a one-time charge on a VA-backed loan. VA’s funding fee page says it applies to refinances as well as purchases, unless the borrower meets an exemption. VA News explains that the fee offsets the program’s cost to taxpayers, which is why VA loans can offer no down payment and no monthly mortgage insurance.
Across the wholesale programs Lendmire places VA files with, the cash-out refinance fee is 2.15% on first use and 3.3% after that. Cash-out does not get a down-payment discount the way a purchase does. The fee follows your use history. Federal law also lets the fee be paid at closing or financed into the loan, per 38 U.S.C. § 3729. Financing it adds to your balance and takes room under the loan ceiling.
An exempt veteran skips all of that.
Who Counts as Exempt?
The statute bars collecting the fee from a veteran who is receiving compensation for a service-connected disability. That covers a veteran who would be entitled to compensation but is receiving retirement pay or active-service pay instead. It also covers a surviving spouse of a veteran who died in service or from a service-connected disability. The regulation at 38 CFR § 36.4313 repeats these groups.
Three points trip people up:
- No rating floor. The law says “receiving compensation.” It sets no percentage. Many sources say “10% or higher” only because compensation generally starts there.
- Retirees need paper. A veteran who chose retirement pay generally needs the original VA rating notice plus proof of retirement income.
- Purple Heart. Some sources list a Purple Heart exemption, and details differ by source. Confirm the current wording on va.gov before you rely on it.
Nobody can decide this by hunch. VA determines status, and the lender reads it from the COE.
How the Exemption Works on a Cash-Out, Step by Step
1. The lender pulls your COE. The COE shows funding fee status. If it shows exempt, you are set.
2. If it does not show exempt, the lender asks for more. The standard tool is VA Form 26-8937, a verification of VA benefits. a VA program notice 26-23-19 covers exemption and refund procedures.
3. The appraisal sets the ceiling. VA’s appraiser sets reasonable value on the Notice of Value. Loan-to-value (LTV) is the total loan, including any fee, divided by that value.
4. The loan is built. For an exempt borrower the loan is the payoff, plus cash out, plus closing costs. A funding fee is not part of the loan amount for an exempt borrower.
5. Disclosures arrive. Your Loan Estimate and Closing Disclosure should show the funding fee line as exempt. Read it against your COE.
That last check matters. Read the line before you sign.
Exempt vs. Non-Exempt: What Changes in the Numbers
The VA cash-out reaches 100% of appraised value, including any financed fee. a VA program notice 26-19-5 sets that 100% ceiling and defines the cash-out types. In a Type I, the loan including the fee does not exceed the payoff of the loan being refinanced. In a Type II, it does.
Picture two veterans with the same home, same appraisal, same payoff and the same wish for cash. Both can reach up to 100% of value, subject to lender guidelines. The non-exempt veteran’s financed fee eats part of that room. The exempt veteran’s does not.
| Item | Exempt | Non-exempt (first use) |
|---|---|---|
| Funding fee | None | 2.15% |
| Fee added to loan | No | Yes, if financed |
| Room under 100% cap | Full | Reduced by fee |
| Appraisal, title, closing costs | Still apply | Still apply |
Less balance means less interest over the life of the loan. I leave out dollar amounts on purpose, because they depend on your file.
What Happens If Your Status Isn’t Settled by Closing?
If exempt status cannot be verified before closing, the fee is collected as if you were not exempt. That is the rule in the handbook language, and it hurts.
Your options in practice:
| Choice | What it means | Risk |
|---|---|---|
| Close now | Fee charged, maybe financed | Refund not guaranteed |
| Wait | Close after the rating is in place | Delay, and your current loan stays |
| Close and ask for a refund | Request one if awarded retroactively | VA decides each case |
VA Circular 26-23-19 tells lenders not to advise veterans to close and plan a refund later. Refund decisions are specific to each veteran and cannot be guaranteed.
The effective date drives everything. A refund generally depends on the award being effective before the closing date. A rating that takes effect only after closing does not earn one.
Active-duty members with a pre-discharge claim face a related rule. The lender should ask about it and submit Form 26-8937 if the COE shows non-exempt. Without a proposed or memorandum rating before closing, the service member is not exempt and gets no VA refund.
So the straight advice is to verify early, well before the Closing Disclosure goes out. Wait if your claim decision is close and the fee would be large. That one is a genuine judgment call, and it depends on how your current loan is holding up while you wait.
What the Exemption Does Not Change
Exempt status removes one charge. Everything else still applies.
- Residual income stays the controlling test. It is the money left each month after major obligations and living costs. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table.
- Net tangible benefit (NTB) still applies. Your lender must give you NTB and loan-comparison information by the third business day after application, and again at closing, under VA Circular 26-18-30. The loan has to help you in a real way, such as removing mortgage insurance or shortening the term. The funding fee is not an NTB item, so an exempt borrower has one fewer cost to recoup.
- Seasoning still applies. When refinancing a VA loan, wholesale programs look for the later of 210 days from the first payment and the sixth payment.
- Credit. VA sets no minimum score. The wholesale programs Lendmire places VA loans with start at a 580 decision score.
- Lender overlays. VA’s ceiling is 100%, but a given lender may set its own lower limit. Exempt status does not override that.
- Closing costs. Appraisal, title and settlement charges remain, and interest accrues as usual.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Edge Cases Worth Knowing
A rating assigned but not yet paid. Ask the lender to confirm the COE reflects it, and bring the VA award letter. Payment status can matter.
A rating change between application and closing. Tell the lender at once. The exempt status the file shows at closing is what counts.
A non-veteran co-borrower. On a joint loan, how the exemption applies depends on lender and VA treatment. Ask early rather than assume.
Surviving spouses. The statute covers a surviving spouse of a veteran who died in service or from a service-connected disability. VA’s page ties this in practice to receiving DIC benefits. Confirm the exact wording with VA, along with any remarriage rule.
Streamline refinances. The exemption also reaches the IRRRL, the VA’s streamline refinance of an existing VA loan, which carries a 0.5% fee unless you are exempt. It is a different program with different rules.
Fixed-to-ARM refinances. A Type I refinance of a fixed loan into an adjustable one can carry a 90% LTV limit under certain conditions. Ask your loan officer how it applies. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Exempt status is not automatic. Check the COE each time you use the benefit.
Common Misconceptions
- “I need a 10% rating.” No. The test is receiving compensation.
- “My lender can waive it.” No. VA determines status.
- “Pay now, get it back later.” Not guaranteed.
- “VA cash-out stops at 90%.” The VA ceiling is 100%. Ninety percent is one NTB option and a common lender overlay.
- “Exempt means no closing costs.” Only the funding fee is exempt.
Key Terms Defined
Funding fee: A one-time VA loan charge that can be paid at closing or financed, and that exempt veterans do not owe.
Certificate of Eligibility (COE): The VA document that shows your eligibility and funding fee status.
Notice of Value: The VA appraiser’s report of reasonable value, which sets the LTV ceiling.
Net tangible benefit (NTB): The test showing a refinance gives the borrower a real gain.
Residual income: The monthly money left after major obligations, VA’s controlling underwriting test.
Seasoning: The waiting period between your first payment on an existing loan and a refinance.
Where to Go Next
Lendmire’s VA cash-out refinance program page lays out how the loan fits together. 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.
Frequently Asked Questions
Do I need a minimum disability rating to be exempt?
No. The statute turns on receiving compensation for a service-connected disability. It sets no percentage threshold.
Can my lender waive the fee for me?
No. Lenders cannot waive it on their own. VA determines exempt status through the COE and Form 26-8937, and the lender follows that.
What if my claim is approved after I close?
It depends on the effective date. A refund generally requires an award effective before closing, and VA decides each case. Circular 26-23-19 says refunds cannot be guaranteed.
Does being exempt let me borrow more?
Not above the ceiling. The 100% cap still applies, and the loan amount remains subject to lender guidelines and an appraisal.
Does exemption cover other VA loans?
Yes. It applies to purchases and streamline refinances as well as cash-out, but check your COE each time you use the benefit.
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
1. VA – Funding fee and closing costs
2. VA News
3. 38 U.S.C. § 3729 (Loan fee), 2012 edition
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 Funding Fee Rules for a Veteran With an Existing VA Loan · VA Cash-Out Seasoning and Fee Rules With Restored Entitlement · Is a VA Cash-Out Worth It for a Veteran With an Existing VA Loan?
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.