The Quick Read: Your disability compensation waives the VA funding fee and carries real weight in underwriting. It does not create a mortgage on a home that has none. A VA cash-out refinance generally needs an existing mortgage or other lien to pay off, so a home with no lien at all usually needs a different route. If any lien remains, even a small second mortgage, the rated-veteran path below applies.
Key Takeaways
- A VA cash-out refinance replaces a lien. With nothing to replace, the program generally does not fit.
- Receiving VA disability compensation waives the funding fee, which is the biggest cost difference between exempt and non-exempt borrowers.
- The rating does not raise your loan amount. Appraised value and residual income set that.
- Disability pay is tax-free, so lenders can gross it up for the debt-to-income check only.
- The new loan, including any financed fee, can reach 100% of appraised value. Reaching it leaves you no equity cushion.
Can You Do a VA Cash-Out on a Paid-Off Home?
Generally, no. A VA cash-out refinance exists to refinance something: an existing mortgage, a second mortgage, or another lien on the property. VA’s own cash-out page describes the loan as taking cash from equity or refinancing a non-VA loan into a VA-backed one. Both descriptions assume a loan is being paid off. VA requires a lien to refinance, and a free-and-clear home has none.
Some web pages suggest a VA cash-out refinance works on a paid-off home, but that mixes up two different products. A paid-off home can be cashed out under conventional rules, which come with different mechanics. Blending the two causes most of the confusion.
Here is where the rule bends in your favor. The lien does not have to be a first mortgage. A remaining second mortgage, a tax lien, or a contractor lien can all count as liens to be paid. Many veterans who think of their homes as paid off still have one of these sitting in the county records. Check your title before you assume.
The program itself is the VA cash-out refinance program. It is a full-underwrite refinance, not the streamlined IRRRL (the interest rate reduction refinance, which only refinances an existing VA loan and skips the appraisal).
If the home truly has no lien, you have other options. A home equity line or a closed-end second mortgage is the usual alternative, and Lendmire’s piece VA Cash-Out vs HELOC for a Veteran With a Paid-Off Home walks through that tradeoff. Lendmire’s piece How to Get a VA Cash-Out Refinance on a Paid-Off Home covers the same question from the other direction.
What a Disability Rating Changes (and Doesn’t)
Your rating changes two things: the funding fee and how your income is counted. Everything else on the file works like any other VA cash-out. Here is the side-by-side.
| Item | Rating changes it? | What happens |
|---|---|---|
| Funding fee | Yes | Waived if you receive compensation |
| Income treatment | Yes | Tax-free pay grossed up for DTI |
| Maximum loan amount | No | 100% of appraised value, fee included |
| Appraisal | No | Required on a cash-out |
| Residual income test | No | Uses your actual income |
| Occupancy | No | Must be your primary residence |
| Closing costs other than the fee | No | Still apply |
That last point trips people up. Exempt does not mean free. The exemption covers the funding fee only. Appraisal, title, and other closing costs still show up on your Loan Estimate and Closing Disclosure.
The funding fee itself is worth understanding. Across the wholesale programs Lendmire places VA files with, the cash-out fee is 2.15% on first use and 3.3% on later use. Veterans can finance it into the loan, which raises the balance. An exempt borrower skips it entirely. On a large balance, that is a meaningful difference at closing and over the life of the loan.
Who Is Exempt, and How to Confirm It
The exemption applies to veterans receiving VA compensation for a service-connected disability. VA’s Buyer’s Guide says so directly. It also lists other exempt groups, such as surviving spouses receiving DIC and certain Purple Heart recipients.
Notice the wording: receiving compensation. The question a lender asks is whether VA is paying you compensation and whether your record shows it.
That is why a rating alone is not the same as an exemption. A rating with no compensation payable may not qualify. A pending claim does not count until VA awards it. Don’t plan a closing around a decision you haven’t received.
Here is how to prove your status:
1. Request your Certificate of Eligibility (COE), the VA document that confirms your entitlement. A lender can pull it for you, and it can show exemption status.
2. Gather your VA award letter, which states your compensation.
3. Keep a recent bank statement showing the deposit.
4. Confirm that the COE or the award letter shows the exemption before closing day.
If an award arrives after closing, ask your loan officer and VA about what, if anything, can be recovered. Treat that as a possibility to ask about, not a plan.
How the Loan Is Underwritten, Step by Step
Underwriting a VA cash-out for a rated veteran follows a clear sequence. Residual income is the controlling test, and the rating’s biggest effect shows up there and in the DTI.
Step 1: Confirm the lien. Identify what gets paid off. Without a lien, stop here and look at alternatives.
Step 2: Confirm occupancy. The home must be your primary residence. VA’s regulation on refinancing speaks of a dwelling owned and occupied by the veteran as a home. A home you have moved out of is a problem.
Step 3: Pull the COE. It shows your entitlement and any exemption. A VA cash-out can draw on entitlement, so ask your loan officer how much you have remaining.
Step 4: Order the VA appraisal. An appraisal is mandatory on a cash-out. A VA-approved appraiser sets the reasonable value, which goes on the Notice of Value. That figure sets your 100% ceiling. A low appraisal shrinks everything downstream, and a request for reconsideration of value is the usual remedy if you believe it missed.
Step 5: Prove the net tangible benefit. The new loan has to be in your financial interest, and the lender must give you a test and a comparison of the old and new loans. The regulation lists qualifying benefits. Examples include dropping monthly mortgage insurance, a shorter term, a lower payment, moving from an adjustable to a fixed loan, or a new loan at or below 90% of reasonable value. Across the programs Lendmire places VA files with, a net tangible benefit and seasoning both apply. Seasoning is the later of 210 days from your first payment and your sixth payment.
Step 6: Run the numbers. Lenders check credit, income, assets, and debts. VA sets no minimum credit score. The wholesale programs Lendmire works with start at a 580 decision score, and some lenders set a higher floor. Your debt-to-income ratio (monthly debts divided by gross monthly income) has a 41% guideline, not a cap. A ratio above it needs residual income well above the table.
Step 7: Close in first lien position. Remaining liens are paid or subordinated.
How Your Disability Income Counts
Your compensation is tax-free. VA’s underwriting chapter lets lenders gross it up to 125% for the DTI ratio, after verifying it is truly tax-free. Two cautions apply.
First, the gross-up is a DTI convention only. Residual income, the controlling test, uses your actual income. Second, the gross-up is meant for borrowers who clearly qualify. It does not rescue a failing file.
In plain terms, the gross-up improves the file on paper. It doesn’t change your real cash flow. A bigger approval does not mean a more comfortable monthly budget. (Veterans who treat the grossed-up number as spendable money are the ones who feel the squeeze later.)
A Worked Example With Percentages
Take a veteran living in a home that appraises at what we’ll call 100% of value. A small second mortgage remains, equal to about 10% of that value. There is no first mortgage. That remaining lien is what makes a cash-out possible. This scenario is modeled, not a quote.
Now run two versions.
| Item | Exempt borrower | Non-exempt borrower, first use |
|---|---|---|
| Funding fee | Waived | 2.15%, financed or paid in cash |
| Maximum loan | 100% of value | 100% of value, fee included |
| Lien to pay off | About 10% of value | About 10% of value |
| Room for cash | Larger | Smaller by the fee |
For the non-exempt borrower, financing the fee uses up part of the 100% ceiling. VA Circular 26-19-05 says VA no longer backs refinances above 100% loan-to-value, and a financed fee cannot push the loan past that line. Any amount over has to be paid in cash at closing.
The exempt borrower keeps that room. Closing costs still reduce the cash that reaches you, so what you actually receive is the loan amount, minus the payoff of the lien, minus those costs.
This is also a Type II refinance. VA calls a refinance Type I when the new loan does not exceed the payoff, and Type II when it does. Only Type II puts cash in your hands.
Where the Rule Bends: Edge Cases
Each of these changes the file in a specific way.
Type I files that pay off a VA loan. These carry extra tests, such as a rate-reduction test and a fee recoupment test. A non-VA payoff is treated differently. Confirm the details with your loan officer rather than assuming.
Non-VA payoff. You can convert a non-VA loan into a VA-backed one. At least one net tangible benefit is required.
Temporary income. VA excludes temporary items, such as education benefits, from qualifying income.
Pending or retroactive awards. Until VA awards compensation, the exemption is not on your record.
State homestead limits. Some states restrict cash-out on a homestead. This guide is national, so ask your lender about your state.
Leverage. Because the VA ceiling is 100% of value, some lenders set a lower cap. Those caps are lender overlays, not VA rules. Lendmire’s wholesale programs reach 100% of appraised value including the financed fee, subject to lender guidelines and full file review.
Buying another home. A VA cash-out refinances the home you live in. It does not buy your next one.
Should You Cash Out at All?
This is the part most guides skip. Pulling cash from a home with little or no debt means taking on a new loan against your safest asset. That deserves a goal.
| Your goal | Usual fit | Tradeoff |
|---|---|---|
| Large one-time need, lien remains | VA cash-out | Exempt from the funding fee, but a full new loan |
| Large one-time need, no lien | Closed-end second or conventional cash-out | Not VA, different rules |
| Flexible access over time | HELOC | Variable use, sits behind any first lien |
| No urgent need | Don’t borrow | Keeps your equity intact |
Three questions help. What is the cash for? Debt payoff, school, and improvements are the common uses VA describes. Will the new payment fit your real income, not the grossed-up figure? And how much equity are you willing to give up? Borrowing to the full 100% ceiling leaves no cushion. If prices dip, you could owe more than the home is worth.
Churn is the quiet risk. Repeated refinances stack closing costs. Compare old and new loans on the same basis: payoff, term, and total cost over the life of the loan. If a comparison skips one of those, ask why.
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 confirms your entitlement and can show funding-fee exemption.
Entitlement: The amount of VA backing available to you, which a cash-out can draw on.
Funding fee: A one-time VA charge that exempt borrowers, such as veterans receiving VA disability compensation, do not pay.
Notice of Value (NOV): The appraisal summary that sets the reasonable value and the 100% ceiling.
Residual income: What is left of your monthly income after taxes, debts, and living costs; it is the controlling VA test.
Net tangible benefit: Proof that the new loan puts you in a better financial position than the old one.
Seasoning: The waiting period between your first payment and when you can refinance.
Next Steps
If you are weighing a cash-out refinance on a home you own outright, Lendmire can help you compare the programs and the equity each one reaches. A mortgage broker arranges the loan through wholesale lenders, and every program figure remains subject to lender guidelines and full file review. Nothing here is a commitment to lend. Start by checking whether any lien is still on your title, then pull your COE.
Frequently Asked Questions
Can I use a VA cash-out if my home has no mortgage at all?
Generally no, because the program refinances an existing lien. If a small second mortgage, tax lien, or contractor lien remains, that can serve as the lien. Otherwise, a home equity line, a second mortgage, or a conventional cash-out on a free-and-clear home are the usual routes.
Does a 0% rating waive the funding fee?
A rating alone is not the test. The exemption applies to veterans receiving compensation for a service-connected disability. If VA is not paying compensation, you may not qualify, so confirm on your COE or award letter.
What if my disability claim is still pending?
The exemption depends on your VA record at closing. A pending claim is not an award. Ask your loan officer what a later award would mean for a file that has already closed, and avoid planning around it.
Does my rating let me borrow more?
No. Your loan amount is capped at 100% of the appraised value, financed fee included. The rating waives the fee and lets lenders gross up tax-free income for the DTI ratio. Residual income uses your actual income.
Is VA disability pay counted as income?
Yes. Lenders document it with your award letter and bank deposits. Because it is tax-free, lenders can count it at 125% for the DTI check after verifying it, but not for residual income.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. 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 cash-out refinance loan page
3. 38 CFR 36.4306 (eCFR): refinancing of mortgage or other lien indebtedness
4. VA Pamphlet 26-7 Chapter 4: Credit Underwriting
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 vs Jumbo Cash-Out for a Veteran With a High-Value Home · VA Cash-Out Refinance Criteria on a Paid-Off Home · How to Close a VA Cash-Out on a Home in an Irrevocable Trust
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.