The Quick Read: A service-connected rating does two separate jobs on a VA cash-out file. It adds tax-free income to the underwriting, and it usually removes the VA funding fee. It does not waive credit, residual income, the appraisal or the net tangible benefit test. Those four still decide the file.
Key Takeaways
- The rating counts as income, and VA does not ask the borrower to prove it will continue.
- The same rating usually waives the funding fee on a cash-out.
- A gross-up can help the debt-to-income ratio. It does nothing for residual income.
- A VA cash-out reaches 100% of the appraised value, but the fee counts toward that cap.
- Whether the rating shows on the certificate of eligibility before closing decides how the fee is handled.
What Does the Rating Change, and What Doesn’t It?
The rating changes the income line and the fee line. Everything else on the file is judged the usual way. Lendmire’s VA cash-out refinance program page covers the basics. This piece covers one slice: how the rating reads once it lands in front of an underwriter.
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.
| File item | Does the rating change it? |
|---|---|
| Qualifying income | Yes, adds compensation |
| Funding fee | Yes, waived when exempt |
| Credit review | No |
| Residual income test | Only through actual income |
| Appraisal and 100% cap | No |
| Net tangible benefit | No |
Think of the rating as a boost on two lines. It is not a pass on the rest of the file.
What Does the Lender Pull First?
The lender pulls the certificate of eligibility, known as the COE. It is the first document in the file, and it carries three things that matter here.
First, it confirms the borrower’s entitlement. Second, it shows whether the borrower is exempt from the funding fee. Third, it can list the monthly amount of service-connected compensation.
That last item is why the COE matters so much. An underwriter does not have to guess at the rating’s value. The certificate can show it, and the award letter backs it up. If the two don’t match, expect a condition asking why.
A lender reads the award letter for a few plain things: the benefit status, the effective date, the monthly amount, and any offsets such as retirement pay. The effective date matters most for edge cases, covered below.
How Does the Lender Treat the Rating as Income?
Compensation is treated as a benefit, and the lender does not need proof that it will continue. The VA Lenders Handbook credit underwriting chapter says so directly. It also says the COE will generally list the amount. Pensions and Aid and Attendance are different. Those need input from VA about whether the income is likely to continue.
Not every VA payment counts. The same chapter says temporary items are not effective income. Its examples are education allowances, including the Post-9/11 GI Bill, and unemployment compensation.
Paperwork is where a rating can run into questions. When the certificate of eligibility, the award letter and the deposits do not match, the lender will ask for an explanation or a corrected document before it counts the income.
Disability can also be combined with other income on one file. A borrower might have a paycheck, retirement pay and compensation. Each stream is documented on its own, and the lender adds up what is verified.
Does the Gross-Up Add Cash? (No)
Compensation is not taxable. Because of that, a lender may count it at a value above face value when it calculates debt-to-income. That is the gross-up. It is a paperwork device. It does not put a dollar more into the borrower’s pocket.
Here is the catch. The gross-up helps the debt-to-income ratio only. Residual income uses actual income, so the gross-up does nothing there. VA’s own credit underwriting training slides treat residual income this way, and household size counts every member of the household.
That split matters because residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it can work if residual income sits well above the table. A ratio under 41% does not rescue weak residual income.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
How the Funding Fee Exemption Works
The funding fee on a VA cash-out is 2.15% on first use and 3.3% after that. A veteran who receives compensation for a service-connected disability is exempt, as are the other groups VA names. The fee is normally financed into the loan, so removing it shrinks the balance.
The exemption turns on receiving compensation. It does not turn on a particular rating percentage. A rating that pays no monthly compensation raises a question, so confirm the borrower’s status with the COE rather than assuming. VA’s page on the funding fee and closing costs is the place to check exemption and refund rules.
The fee also affects the loan cap. A VA cash-out reaches 100% of the appraised value, and the financed fee counts inside that number. For a borrower who owes the fee, any piece that would push the loan past 100% must be paid in cash at closing.
Which Cash-Out Rules Does the Rating Leave Alone?
The rating does not touch the rules that govern the cash-out itself. These come from VA, not from the lender’s preference.
| Rule | What it says |
|---|---|
| Loan cap | Up to 100% of appraised value |
| Fee in the cap | Financed fee counts toward 100% |
| Net tangible benefit | Required on every cash-out |
| Seasoning | The later of 210 days from the first payment or the 6th payment |
| Credit | Wholesale programs start at a 580 decision score |
The 100% cap comes from 38 CFR 36.4306, and VA Circular 26-18-30 restates it. Some borrowers hear that the figure is 90%, but the VA cash-out reaches 100% of the appraised value. The 90% number is only one way to pass the net tangible benefit test, which asks whether the new loan clearly helps the borrower. The same circular lists the ways to pass, and the lender documents which one applies. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
Appraisal matters just as much. Lendmire’s article How a VA Lender Reads the Appraisal on a Cash-Out explains why value sets the ceiling on the cash a borrower can reach. A strong rating cannot raise a low appraisal.
Two more points belong here. Refinancing a non-VA loan into a VA loan counts as a cash-out under VA rules, even when the borrower takes no cash. The cash-out also does not use the half-percent rate-reduction test that belongs to the IRRRL, VA’s streamlined refinance.
Some lenders add their own limits, such as a stricter seasoning period or a lower loan-to-value cap than VA’s 100%. This is where a broker helps: the programs that write a given scenario depend on the borrower’s credit, equity and documents.
Where Does the General Rule Break?
Pending claim at closing. If exempt status can’t be verified before closing, the fee is collected as if the borrower were not exempt. A refund may be possible if VA later awards compensation with an effective date before closing. A rating dated after closing does not qualify. Ask the loan officer how a refund would work on your file.
Active-duty borrowers with a claim in progress. The lender may need to verify benefits through VA before treating the borrower as exempt.
Aid and Attendance or Pension. These need VA input on whether the income continues. Treat them differently from compensation.
Temporary or reduced ratings. The lender reads the award letter for status and effective date. A rating under review raises a fair question about future income. That’s a documentation issue, and the file notes it.
Other exempt groups. Surviving spouses who receive Dependency and Indemnity Compensation can be exempt, as can a Purple Heart recipient on active duty.
Mismatched documents. The COE, the award letter and the bank deposits should tell the same story. When they don’t, expect a condition. A corrected letter can resolve it.
One honest uncertainty: the rating may add enough income to carry a high debt-to-income ratio, but only if residual income holds. Weak residual income can sink a file that looks strong everywhere else.
A Worked Example
Picture two homeowners with the same credit, the same home and the same appraised value. Both want a VA cash-out at the full 100% of value.
The first owes the funding fee, 2.15% on a first use. The fee counts inside the 100%, so the cash available shrinks. Any part that would push the loan past the cap must be brought to closing.
The second is exempt because of a service-connected rating on the COE. No funding fee sits inside the cap, so more of the 100% is available as proceeds, or the loan simply ends up smaller for the same cash out.
The difference between them comes down to whether the rating is on the COE when the loan closes.
Step by Step: How the File Runs
1. The lender pulls the COE and checks entitlement, exempt status and the compensation amount. 2. The borrower supplies the award letter, and the lender matches it to the COE. 3. The lender documents income, with the gross-up applied to debt-to-income only. 4. The lender tests residual income using actual income and household size. 5. Compensating factors are reviewed if the debt-to-income ratio runs high. 6. The appraisal sets value, and the loan stays at or under 100%. 7. The lender documents the net tangible benefit. 8. The decision is recorded on VA Form 26-6393, the loan analysis form.
What to have ready: the most recent award letter, the COE, recent bank statements showing the deposit, the current mortgage statement, and proof of any other income.
Key Terms Defined
Certificate of eligibility (COE): the VA document that confirms entitlement and can show exempt status and compensation.
Gross-up: counting tax-free income at a higher value for debt-to-income only.
Residual income: the money left each month after debts, taxes and living costs, tested against a VA table.
Net tangible benefit: the requirement that a VA cash-out clearly help the borrower.
Funding fee: the VA charge on most loans, financeable and waived for exempt borrowers.
Seasoning: the waiting period that applies to a refinance of an existing VA loan.
Next Step
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. Lendmire is a mortgage broker, so the review runs across several wholesale lenders, and every figure is subject to lender guidelines and full file review.
Frequently Asked Questions
Does a low rating hurt my chances on a VA cash-out?
No. The rating adds income and can waive the funding fee. It is not a score that gets graded. Credit, residual income, the appraisal and the net tangible benefit decide the file, and the rating doesn’t count against any of them.
Can disability be my only income?
It can be part of the file, and VA does not require proof of continuance for compensation. The borrower still has to pass the residual income test and the credit review. Lenders may also set their own requirements on top, so the answer depends on the program.
Does the gross-up raise my residual income?
No. The gross-up helps debt-to-income only. Residual income uses actual income and the number of people in the household. A borrower with a high ratio needs residual income well above the VA table.
What if my rating is awarded after I close?
A refund may be possible if VA sets an effective date before closing. A date after closing does not qualify. Check the current rules on VA’s funding fee page before relying on a refund.
Does the rating let me skip the net tangible benefit test?
No. Every VA cash-out must show a net tangible benefit. The rating waives the fee, not the test.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. 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 Pamphlet 26-7, Chapter 4, Credit Underwriting
2. VA Loan Guaranty Conference credit underwriting slides
3. VA.gov: Funding Fee and Closing Costs
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 to Get More Cash From a VA Cash-Out Than a Conventional Loan · VA Cash-Out Refinance vs Conventional Cash-Out on a Fourplex · How a Lender Classifies a Type I VA Cash-Out With Rolled-in Costs
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.