The Quick Read: A disability rating changes two things on a VA cash-out file. It adds stable income, and it can remove the funding fee. It does not change the cash-out rules themselves. Credit, appraisal, seasoning, net tangible benefit and residual income all still apply. Every figure here is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Most veterans ask whether a higher rating unlocks more cash. It doesn’t. The rating decides what income goes on the file and whether the fee is waived. The loan tests stay the same.
This piece walks through the mechanics: how disability income is counted, how residual income controls the decision, how the funding fee exemption works, and where files with a rating get stuck. Lendmire is a mortgage broker that arranges VA loans through wholesale lenders. The brokerage’s VA cash-out refinance program page covers the product itself.
Key Takeaways
- VA disability compensation counts as qualifying income, and the lender does not need to document that it will continue.
- Residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap.
- Receiving compensation is what waives the funding fee. The rating percentage does not matter.
- Only the funding fee is waived. Appraisal, title and other closing costs remain.
- A cash-out reaches up to 100% of the appraised value, including any financed fee, subject to seasoning and a net tangible benefit.
Key Terms Defined
Certificate of Eligibility (COE): The VA document that confirms entitlement, fee-exempt status and the monthly compensation amount.
Effective income: Income that is verifiable, stable and expected to continue.
Gross-up: A lender adjustment that raises non-taxable income on paper to a taxable-equivalent figure so the debt ratio reflects its tax-free status.
Residual income: The money left each month after the mortgage, debts, taxes and an allowance for living costs, measured against a VA table.
Net tangible benefit (NTB): A test showing the new loan actually improves the borrower’s position.
Seasoning: The minimum time and payment history on the existing loan before it can be refinanced.
Funding fee: A one-time VA fee that exists because the program has no down payment and no monthly mortgage insurance.
How Do Lenders Count VA Disability Income?
Lenders count it as effective income, and it is one of the cleaner income types on a file. The VA Lenders Handbook, Chapter 4, defines effective income as verifiable, stable and reliable, and anticipated to continue. The same chapter treats VA disability income as a benefit that does not need to be documented for continuance. A veteran does not have to show three years of history or a future payment schedule.
The COE does much of the documentation work. Pulled through VA’s system, it shows available entitlement, whether the veteran is exempt from the funding fee, and the monthly service-connected compensation amount. Underwriters match that figure to the monthly deposits in bank statements. A mismatch is the first thing that draws a condition.
Disability income can also be grossed up. Compensation is generally not taxable, so a lender may raise it to a taxable-equivalent figure when calculating the debt ratio. Lender training material from VA has described the adjustment as using tax tables, with a figure usually near 15% for a veteran whose only income is non-taxable. Treat that as a general description, not a promise. Each lender applies its own method within VA’s rules. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Here is the catch on gross-up. It changes how the ratio is calculated. It does not change the payment, and it does not put more cash in the borrower’s pocket. It helps on paper. Residual income still measures real cash flow.
What Does and Doesn’t Change With the Rating?
The rating changes the income line and the fee line. Nothing else moves. VA’s cash-out rules do not vary by rating tier, and fee exemption turns on receiving compensation, not on the percentage.
| Item | Changes with a rating? | Notes |
|---|---|---|
| Qualifying income | Yes | Compensation added, continuance not documented |
| Funding fee | Yes | Waived for veterans receiving compensation |
| Maximum cash-out leverage | No | Up to 100% of appraised value, fee included |
| Seasoning | No | Same requirement as any VA cash-out |
| Net tangible benefit | No | Applies to every cash-out |
| Credit review | No | Wholesale programs start at a 580 decision score |
| Closing costs other than the fee | No | Appraisal, title and others remain |
A 10% rating and a 100% rating both qualify for the waiver. The higher rating adds more income to the file, which can help the ratio. That is the only difference.
Residual Income Controls the File
Residual income is the controlling test on a VA loan. A file above 41% needs residual income well above the VA table to move forward.
Residual income works like this. The lender takes the borrower’s monthly income, subtracts the new housing payment, taxes, other debts and a set allowance for living costs, and compares what is left with a VA table. The table varies with family size and region. A larger household needs more left over.
For a rated veteran, this is where the grossed-up income earns its keep. It lowers the debt ratio on paper. Then residual income checks whether the real cash is there. A file can pass the ratio and still fail residual income if the household is large and debts are heavy.
In practice, three habits keep these files clean:
1. Pull the COE first and confirm it shows exempt status and the compensation amount.
2. Collect the VA award letter and match it to the bank deposits before the file goes in.
3. List every debt and every income line up front, so residual income is built once and not rebuilt after a condition.
What Is the Net Tangible Benefit Test?
Every VA cash-out has to show the borrower comes out ahead. VA Circular 26-19-05 says the net tangible benefit standards apply to all cash-out loans. The loan has to pass the NTB test, a loan comparison, and a Home Equity Disclosure.
The circular also sorts refinances into three categories: IRRRL, Type I cash-out and Type II cash-out. A Type I loan, fee included, does not exceed the payoff of the loan being refinanced. A Type II loan exceeds the payoff, which means cash reaches the borrower. A veteran taking cash for debt payoff, school or home improvements is generally in Type II territory.
The same circular stopped VA guarantees on refinances above 100% loan-to-value. LTV is the total loan, including any funding fee, divided by the appraiser’s reasonable value. A financed fee cannot push the loan past that value. Across the wholesale programs Lendmire places VA files with, the cash-out reaches 100% of the appraised value including the financed fee, refinances any loan type into VA, and carries seasoning of the later of 210 days from the first payment or the sixth payment. Lender guidelines can be tighter, so a given lender may set a lower cap than VA allows.
How the Funding Fee Exemption Works
A veteran receiving compensation for a service-connected disability does not pay the funding fee. VA’s fee page lists that exemption first, and it explains the fee exists because the program has no down payment or monthly mortgage insurance.
The numbers show why it matters. On a cash-out refinance, the fee is 2.15% for first use and 3.3% for subsequent use. The fee can be financed, which means it gets added to the loan balance. An exempt veteran skips it. That keeps the balance lower and leaves more of the 100% ceiling available for actual cash.
A few cautions on the exemption:
- It waives the funding fee only. Appraisal, title, origination and other costs remain.
- VA’s wording is “receiving” compensation. A pending claim generally has not met that wording at closing.
- The COE should show exempt status. If it doesn’t, the lender may need the VA award letter to correct it.
For more on how the fee interacts with a claim that hasn’t been decided, see Lendmire’s piece VA Cash-Out Funding Fee Exemption Rules for a Pending Disability Rating.
Where the Rules Break: Edge Cases
Most rated-veteran files run clean. These are the situations that don’t.
Income not on the COE. Some files have disability income that the COE doesn’t show. The handbook says the lender must then document it another way. Expect a request for the award letter and several months of deposits.
Pending claim. Income that hasn’t been awarded can’t be used, and the fee generally can’t be waived until compensation is being received. Some veterans in related situations, such as those drawing retirement pay while entitled to compensation, may be exempt. Confirm those cases against VA’s own pages before relying on them.
Temporary or re-evaluated ratings. VA disability income needs no continuance documentation, but a lender will still read the award letter. A scheduled review date draws questions. A rating that drops mid-process changes the income on the file.
Temporary VA income. Education benefits such as the Post-9/11 GI Bill are not effective income. Unemployment counts only when it is a regular part of the work, such as seasonal work.
VA pension and Aid and Attendance. These get separate treatment in the handbook. A loan officer confirms the current rule before counting either one.
Non-VA loan being refinanced. A VA cash-out can convert a conventional or FHA loan into a VA loan. The IRRRL cannot. It is VA-to-VA only, and a rating does not turn it into a cash-out.
Mixed income stacks. Disability plus pension, Social Security, part-time work or a spouse’s income is common. Each line gets its own documentation. Disability and Social Security need award letters and matching deposits. Wages need pay stubs. Temporary lines get excluded.
Documents by Income Type
| Income type | Typical document | Common lender question |
|---|---|---|
| VA disability | COE, award letter | Does the deposit match the award? |
| Retirement pay | Statement, deposits | Is there an offset against disability? |
| Social Security | Award letter, deposits | Is the amount current? |
| Wages | Pay stubs, W-2s | Is the job stable? |
| Spouse income | Same as above | Is the spouse on the loan? |
Why Lower Payment Is Not the Same as a Better Deal
Be careful with any cash-out offer built around the monthly payment. The CFPB fined a VA lender $2.25 million after it said the company showed the new loan’s payment as principal and interest only and compared it with an old payment that included more. The comparison was misleading.
Read the Loan Estimate and Closing Disclosure line by line. A cash-out replaces the old loan with a larger one, so the balance goes up even when the payment looks lower. VA itself tells borrowers to weigh closing costs and to compare the new loan amount with the home’s value.
Common Reasons Rated-Veteran Files Get Conditioned
- Award letter and bank deposits don’t match.
- COE shows the wrong fee status or no compensation amount.
- Residual income falls short for the household size.
- Appraisal comes in below the value needed once the fee is financed.
- Seasoning on the old loan isn’t met.
- A scheduled rating review isn’t explained.
- Debts missing from the application show up on the credit report.
If a file is turned down, the useful next step is to ask which test failed. A low appraisal, short seasoning and thin residual income each have different fixes.
What the Decision Looks Like in Practice
Picture a veteran with a rating, a conventional loan on the home, and a plan to pay off high-balance debt. The steps run in order:
1. Get the COE and confirm exempt status and the compensation amount.
2. Decide whether the loan is a cash-out. If cash reaches the borrower, it is.
3. Check seasoning on the current loan.
4. Gather the award letter, deposits and any other income documents.
5. Order the appraisal and confirm the total loan, fee included, stays within 100% of value.
6. Run residual income for the household.
7. Compare the new loan against the old on the Loan Estimate, balance and cost, not payment alone.
The rating shortens a few of those steps. It does not skip any of them. For a closer look at how much cash a rated veteran actually walks away with, see Lendmire’s piece How Much a Veteran With a Disability Rating Keeps in a VA Cash-Out.
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
Does my disability rating percentage change how much cash I can take out?
No. VA’s cash-out rules do not vary by rating tier. The rating adds income to the file and can waive the funding fee. Cash available depends on the appraised value, the payoff on the current loan, and the 100% ceiling, subject to lender guidelines.
Can disability be my only income on a VA cash-out?
It can count as effective income, and VA does not require continuance documentation for it. The file still has to pass credit, residual income and the net tangible benefit test. A lender will want the COE, the award letter and matching deposits.
Does the funding fee exemption remove all my closing costs?
No. It waives only the funding fee. The fee on a non-exempt cash-out is 2.15% for first use and 3.3% for subsequent use.
What if my claim is still pending?
Pending income generally can’t be counted, and the fee is generally not waived until compensation is being received. Once an award is in place, ask the lender whether a correction to the COE is needed.
Does gross-up give me more spending power?
No. It changes the debt-ratio math on paper. The payment and the cash in your account stay the same. Residual income is the test that measures real cash flow.
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.
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References
1. VA Lenders Handbook, Chapter 4
3. VA – Funding fee and closing costs
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: Can a Veteran With a Low First Mortgage Get a VA Cash-Out? · VA Cash-Out Income Documentation for Pay, Disability and Retirement · VA Cash-Out Occupancy Rules for a Surviving Spouse
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.