The Quick Read: A funding fee exemption removes the VA funding fee from your cash-out refinance entirely, and it comes from federal law rather than from a lender’s goodwill. The fee on a cash-out is 2.15% of the loan for first use and 3.3% after that. If VA’s records show you as exempt on the day you close, that line is zero. You don’t finance it, and it doesn’t eat into your equity ceiling. What decides the outcome is the status VA has on file at closing, not a claim you expect to win later.
Key Takeaways
- The exemption covers the funding fee only. Appraisal, title, credit review and seasoning rules stay the same.
- Your Certificate of Eligibility (COE) is the proof. It shows EXEMPT, NON-EXEMPT or CONTACT RLC.
- A pending disability claim does not exempt you. Official status at closing controls.
- No fee means a smaller loan balance and more room under the loan-to-value ceiling.
- Rules differ slightly by loan type, so a cash-out is not handled exactly like a streamline refinance.
What Is the Funding Fee, and What Does the Exemption Remove?
The funding fee is a one-time charge VA collects on most loans it guarantees. It replaces monthly mortgage insurance, which VA loans don’t have. On a cash-out refinance, the fee is a percentage of the new loan amount, and borrowers usually roll it into the loan.
VA cash-out estimate
Seeded with an example value, a typical balance, and a round cash request at the first-use fee; change any field.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a VA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the full-value VA cap with the first-use funding fee financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a VA cash-out refinance quote; a VA loan is priced by the lender at lock. The total loan, funding fee included, is capped at the program leverage on the reasonable value; the fee follows the tier chosen. The cash available is what the cap allows less the balances paid off and the fee, before closing costs, which are not included. The HELOC line is the line program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. The debt-to-income figure is a guideline; residual income decides a VA file. Licensed in sixteen states for consumer mortgages.
The fee is also separate from everything else on the file. Think of it as a toll booth you get waved through. The road, the car and the driver’s license check stay the same.
Who Qualifies for the Exemption?
Veterans who receive VA compensation for a service-connected disability are exempt from the funding fee. That is the core category, and it is the one most cash-out borrowers ask about.
A few other groups also qualify. A service member with a proposed or memorandum rating issued before closing is covered. Surviving spouses receiving Dependency and Indemnity Compensation (DIC) are exempt as well. Veterans who would be entitled to compensation but receive retirement or active-duty pay instead may also qualify. Confirm that last group against the current list on VA.gov’s funding fee page, which also cites the statute behind the exemption.
Two points surprise people:
- There is no minimum rating. You don’t need 30% or 50%. What matters is whether VA pays you compensation. A rating that results in no payment, such as a 0% rating, usually doesn’t create the exemption, so VA’s determination controls.
- Surviving spouses have their own path. The documentation and timing differ from a veteran’s.
How Does a Funding Fee Exemption Work on a VA Cash-Out, Step by Step?
Here is the sequence on a typical file, start to finish. Lendmire’s VA cash-out refinance program page covers the loan itself. This section covers where the exemption plugs in.
Step 1: Pull the COE. The lender requests your Certificate of Eligibility. It has a funding fee field with one of three statuses. The table below defines each.
| COE status | What it means | What happens next |
|---|---|---|
| EXEMPT | VA shows you as exempt | Fee is $0 on the file |
| NON-EXEMPT | VA shows no exemption | Fee applies, unless status changes |
| CONTACT RLC | VA needs to review | Lender contacts the Regional Loan Center |
If the COE doesn’t show the exemption but you have it, the VA’s Buyer’s Guide says a VA award letter can serve as evidence.
Step 2: Resolve any pending claim. VA’s Circular 26-21-11 says lenders must use due diligence on exemption status before closing. They must not ignore information pointing to an exemption. They also must not advise a possibly exempt borrower to finance the fee and sort it out later. VA can’t guaranty the loan until the fee question is settled.
Step 3: Order the VA appraisal. A cash-out needs a VA appraisal, and the appraised value sets the ceiling. The VA cash-out reaches up to 100% of the appraised value, and that figure includes any financed funding fee. The loan-to-value ratio is the total loan, fee included, divided by reasonable value.
Step 4: Underwrite the file. Exempt or not, you get the full review. Across the wholesale programs we place files with, that means credit, residual income (the money left each month after major expenses, which VA treats as the controlling test), and a net tangible benefit, meaning the loan must help you in one of VA’s listed ways. Seasoning applies if you are refinancing an existing VA loan. All of it is subject to lender guidelines and full file review.
Step 5: Check the closing documents. The exemption flows from the COE to the funding fee line on your Closing Disclosure. Look at that line before you sign. It should read zero. If it doesn’t, stop and ask why.
What Does Exemption Do to the Loan Math?
Here is the loan math in percentages, with no dollar figures, using a home appraised at 100% of its value.
A non-exempt first-use borrower takes a cash-out. The 2.15% fee is calculated on the loan and added to it. That added amount counts against the 100% ceiling. So if you want the maximum, the fee takes up part of your room, and the cash you walk away with is smaller than the ceiling suggests.
An exempt borrower asking for the same maximum has no funding fee added to the loan. The whole ceiling is available as loan proceeds and payoff.
| Item | Non-exempt, first use | Non-exempt, repeat use | Exempt |
|---|---|---|---|
| Funding fee on cash-out | 2.15% | 3.3% | — |
| Fee added to loan balance | Yes, if financed | Yes, if financed | No |
| Loan balance vs. same request | Larger | Largest | Smaller |
| Room under 100% ceiling | Reduced by fee | Reduced most | Full |
Two practical effects follow. Your new balance is smaller, so your monthly obligation is lower than it would be with the fee financed. And if the appraisal comes in tight, the exemption can be what keeps the request inside the ceiling.
Pending claim at closing
The fee is collected. The exemption doesn’t apply to a claim that hasn’t been decided. If VA later grants compensation effective on or before your closing date, you may be eligible for a refund. Contact VA for the current refund procedure, since the details can change.
This leads to a real decision. You can close now and pay the fee, with a possible refund later. Or you can wait for the decision and close exempt. If your timing is flexible and a decision seems close, waiting can make sense. If you need the cash or the better loan terms now, closing may win. It’s a toss-up that depends on your claim’s status, and a loan officer can walk through both.
Active-duty service member with a pre-discharge claim
The lender submits VA Form 26-8937, Verification of VA Benefits, and contacts the Regional Loan Center about a proposed or memorandum rating. If one isn’t in hand before closing, the exemption doesn’t apply, per Circular 26-21-11. For unadjudicated claims, Circular 26-23-19 adds a COE status of “Non-Exempt – In Development.”
Streamline refinance versus cash-out
An interest rate reduction refinance loan (IRRRL), VA’s streamline option, doesn’t require a COE, and exemption status is handled on the IRRRL itself. The IRRRL fee is 0.5% unless you’re exempt. A cash-out requires a COE. Don’t assume the streamline process carries over.
| Loan type | Funding fee (non-exempt) | COE required? |
|---|---|---|
| Cash-out refinance | 2.15% first use, 3.3% after | Yes |
| IRRRL | 0.5% | No |
| Purchase | 1.25% to 3.3%, by use and down payment | Yes |
Refinancing a non-VA loan into VA
A cash-out can refinance any loan type into VA. The cash-out fee applies unless you’re exempt, and the exemption works the same way here.
A new lender, a new loan
The exemption doesn’t travel as a credit, and the fee applies per loan. Each new VA loan gets a fresh look at your status. If your rating changes, the new loan reflects the new status.
Occupancy
VA cash-outs are generally for a home you live in. Confirm occupancy rules with your loan officer before assuming a second home or rental qualifies.
What the Exemption Doesn’t Change
This is where borrowers get tripped up. Exempt means no funding fee. It doesn’t mean no closing costs.
- Appraisal, title, recording: these remain.
- Credit and residual income: the full review still applies.
- Seasoning and net tangible benefit: same tests, same standards.
- The 100% ceiling: unchanged, though you reach more usable equity under it.
- Lender policy: some lenders set their own lower ceiling or a higher credit floor than VA does. That is lender policy, not VA’s rule.
The VA’s Buyer’s Guide notes that closing costs generally can’t be rolled into a VA loan except on refinances, so check how your lender treats them on a cash-out.
How Do You Make Sure the Exemption Actually Applies?
Treat this as a checklist, because errors are cheaper to fix before closing.
1. Get your COE early and read the funding fee field yourself.
2. Bring your VA award letter if the COE doesn’t show exempt status but you receive compensation.
3. Tell the lender about any pending claim right away, not at the last minute.
4. Ask for an updated COE shortly before closing if the status recently changed. Circular 26-21-11 has lenders request one before closing in this situation.
5. Read the Loan Estimate and the Closing Disclosure. The funding fee line should show zero.
6. If the line is wrong, raise it before signing. The exemption is statutory. A lender can’t grant it and can’t ignore evidence of it.
One more thing about sequence. If a lender tells you to finance the fee now and fix it later, that is the advice VA says lenders shouldn’t give a possibly exempt borrower.
Key Terms Defined
- Funding fee: a one-time charge VA collects on most guaranteed loans, calculated as a percentage of the loan amount.
- Funding fee exemption: a legal waiver of that fee for veterans receiving compensation for a service-connected disability and certain other groups.
- Certificate of Eligibility (COE): the VA document that confirms you can use the benefit and shows your funding fee status.
- Regional Loan Center (RLC): the VA office that reviews files when the COE can’t settle the status on its own.
- Net tangible benefit: a requirement that the refinance help you in a way VA recognizes, such as lowering costs or improving the loan’s structure.
- Seasoning: a waiting period between loan events, such as making enough payments on your existing VA loan before refinancing it.
- Loan-to-value (LTV): the loan amount divided by the home’s appraised value. On a VA cash-out it can reach 100%, counting any financed fee.
- Residual income: what’s left of your monthly income after major obligations. It is the controlling test on VA files.
Frequently Asked Questions
Does the exemption apply to a cash-out refinance, or only to purchases?
It applies to cash-out refinances. The exemption attaches to the borrower’s status, not the loan type. Purchases and the streamline interest rate reduction refinance loan (IRRRL) are covered too, though each is documented differently.
Can I get a refund if VA approves my claim after I close?
You may be eligible. If VA grants compensation effective on or before your closing date, the fee you paid may be refundable. Contact VA for the current process, since the details can change.
Does my disability rating percentage matter?
No minimum rating is required. What counts is whether VA pays you compensation. A 0% rating usually doesn’t pay compensation, so it usually doesn’t exempt you, and VA’s determination controls.
Can I still finance the funding fee if I’m not exempt?
Yes, the fee is financeable on a cash-out. It counts toward the program’s loan-to-value ceiling, which never exceeds 100% of value, so it reduces how much cash you can take out at the maximum.
Is the funding fee tax-deductible?
We can’t tell you that it is or isn’t. Tax treatment can depend on your situation, so speak with a qualified tax professional before relying on any deduction or credit.
Where This Leaves You
If you receive VA disability compensation, check your COE first and make sure the funding fee field says EXEMPT. If you have a claim in process, decide with a loan officer whether closing now or waiting fits your timeline. Either way, read the fee line on your Closing Disclosure before you sign.
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. Program terms are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
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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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. VA.gov: Funding Fee and Closing Costs
2. VA Home Loan Guaranty Buyer’s Guide
This article is part of Lendmire’s VA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How a VA Lender Counts Triplex Rent on a Cash-Out · Best VA Cash-Out Refinance Program to Qualify for a VA Funding Fee Waiver · How Entitlement Works on a VA Cash-Out Refinance With a New COE
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.