The Quick Read: You claim the exemption by getting VA to show you as exempt, or having your lender prove it, before closing. The fee is waived for veterans who receive compensation for a service-connected disability, and for certain surviving spouses. Your award letter and the certificate of eligibility (COE) do the work, and the lender handles the paperwork.
The funding fee is a one-time charge VA collects on most VA loans. On a cash-out refinance, the fee for non-exempt borrowers is 2.15% of the loan on first use and 3.3% after that. The fee can be financed into the loan. For an exempt borrower, that line is zero.
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 exemption is a closing-date question. VA has to show you as exempt, or your lender has to prove it, before the loan closes. This article walks through who qualifies, the steps to claim it, what to do when the paperwork is wrong, and where the general rule breaks.
Who Qualifies for the Exemption?
The exemption comes from federal law, not from a lender’s goodwill. 38 U.S.C. § 3729 says VA collects a funding fee from each person getting a VA housing loan, except as the waiver provisions allow. The waiver text in Title 38 covers two main groups:
- A veteran who receives compensation for a service-connected disability. This includes a veteran who would receive compensation but is instead receiving retirement pay or active service pay.
- A surviving spouse of a veteran who died from a service-connected disability, who is receiving Dependency and Indemnity Compensation (DIC).
The statute does not carve out cash-out refinances. If you qualify, you qualify on a cash-out too.
The question is whether VA has you on record as receiving compensation, not how high the disability rating sits.
| Who | What proves it | Where it shows |
|---|---|---|
| Veteran receiving compensation | VA award or benefit letter | COE funding fee status |
| Veteran taking retirement pay instead | Original VA disability rating notice plus retirement income documents | Lender-verified status |
| Surviving spouse | Proof of Dependency and Indemnity Compensation (DIC) | COE status |
| Active-duty member with a claim | A proposed or memorandum rating before closing | COE updated by VA |
Two groups need extra care. For a surviving spouse, the exemption turns on receiving DIC, so a spouse who is a co-borrower on a VA loan is not exempt unless receiving DIC. And an active-duty service member with a pre-discharge claim is exempt only if a proposed or memorandum rating exists before closing.
Being a Purple Heart recipient is not a separate exemption category in the two groups above. A Purple Heart recipient is exempt only by falling into one of them, and your COE shows whether VA records you that way.
How Do You Claim the Exemption, Step by Step?
Start with your COE and end with your closing paperwork. Each step below is something you or your lender does before the loan closes. Miss one and you may pay the fee first and chase a refund later.
1. Request or pull your COE. When VA issues a COE, it checks your loan eligibility and whether you are exempt because of a service-connected rating. Look for the funding fee field.
2. Read the status. It should read Exempt or Non-Exempt. Some COEs instead tell you to contact a VA Regional Loan Center. Treat that as a flag to follow up, not an answer.
3. Fix a wrong status early. If the COE shows Non-Exempt but you receive compensation, give your lender your VA award letter. The lender submits VA Form 26-8937, Verification of VA Benefits, and VA updates the record.
4. Tell your loan officer you are claiming it. Say it at application, not at the closing table. Lenders are told to make sure exemption information is current at closing, but they work from what you give them.
5. Check the disclosures. Your Loan Estimate and Closing Disclosure should show no funding fee. If a fee appears, flag it right away.
6. Let the lender document it. For an exempt loan, the lender includes proof of exemption in the closed-loan package. For a non-exempt loan, it pays the fee through VA’s payment system.
Retirees have one more route. VA’s lender rules accept the original disability rating notice plus documentation of the retirement income as an alternative to Form 26-8937. Ask your lender whether it will use that route or the form.
What Documents Do You Need?
Three documents do almost all the work. Each proves something different.
| Document | What it proves | Who supplies it |
|---|---|---|
| VA award or benefit letter | You receive compensation | You |
| Certificate of eligibility | Your eligibility and fee status | VA, via you or the lender |
| VA Form 26-8937 | Lender-verified benefit status | Lender submits it |
The award letter is your raw evidence. The COE is what the lender usually relies on. The form is the fix when the two disagree. Keep copies of all three, and bring the letter to the first conversation with your loan officer.
What If the Paperwork Doesn’t Match?
Exemption problems tend to fall into four patterns. Here is how each one usually plays out.
| What you see | Likely cause | What to do |
|---|---|---|
| COE says Non-Exempt, but you receive compensation | VA record not updated | Give lender your award letter; lender submits Form 26-8937 |
| COE says contact the Regional Loan Center | VA needs to review the record | Call the center or let the lender route it |
| Exempt, but a fee shows on the Loan Estimate | Lender used old data | Send the COE and ask for a corrected disclosure |
| Claim still pending | VA has not yet decided | See the next section |
Do all of this before closing. VA’s lender rules say that if exempt status cannot be verified before closing, the fee must be paid as if you were not exempt. VA then determines your status and refunds the fee if appropriate. That is a refund process, not an exemption, and it takes effort on your side.
What If Your Disability Claim Is Still Pending?
A pending claim is not an exemption. If VA has not decided, the lender cannot verify your status, so the fee gets collected at closing.
You may still get that money back. VA’s loan fee page says a refund is possible if your claim was pending at closing and VA later awards compensation. One condition matters most: the effective date has to be retroactive to a date before your closing. The decision date alone is not enough.
If the award’s effective date falls before the closing date, a refund path opens. If it falls after, it does not.
That condition creates a real timing choice. You can close now and pay the fee, with a possible refund later. Or you can wait for the decision and close exempt. Neither is automatically right. It depends on why you are refinancing and how firm the retroactive date looks.
Lenders are told not to advise veterans to close and plan to ask for a refund later. Treat a refund as a backstop, not a plan.
How Does a Refund Work?
You have to ask for it. Refunds are not automatic. Contact your mortgage holder or the VA Regional Loan Center. For refunds issued on or after July 1, 2019, VA pays the veteran directly, regardless of your loan balance. It does not reduce your mortgage.
Does the Exemption Change the Rest of the Cash-Out?
It removes one cost. It does not relax anything else. Think of it as deleting a line item, not changing the loan’s rules.
Here is what still applies. VA Circular 26-19-5 sets the cash-out rules. VA will not guarantee a refinance above 100% of the appraiser’s reasonable value, and the financed fee counts toward that ceiling. Net tangible benefit standards apply to every cash-out. Across the wholesale programs Lendmire works with, a VA cash-out reaches 100% of the appraised value including the financed fee. It can refinance any loan type into VA. It also carries seasoning of the later of 210 days from the first payment and the 6th payment, plus a net tangible benefit, which means meeting one of VA’s eight listed benefits.
The exemption does help in one way. Since a financed fee counts toward the 100% ceiling, an exempt borrower has more room under it. More of that ceiling can come out as cash instead of covering the fee.
Two tests you may hear about do not apply here. The half-percent rate-reduction test and the fee-recoupment test are rules for the streamlined refinance, the IRRRL. They do not apply to a VA cash-out. (Some older web pages blur this. Ignore them.)
Underwriting still runs the same way. Residual income is the controlling test, meaning VA wants to see enough money left each month after debts 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. The wholesale programs Lendmire places VA loans with start at a 580 decision score. Everything here is subject to lender guidelines and full file review.
For a broader look at how the program works, see Lendmire’s VA cash-out refinance program page.
What Does the Exemption Save You?
Exempt borrowers pay none of the funding fee. That matters in two ways.
First, closing costs drop. The fee is one of the larger single items on a non-exempt cash-out, and it is gone.
Second, a financed fee raises your balance, which raises what you owe and what you pay in interest over time. Skipping the fee avoids that. Run the specifics with your loan officer, who can show the difference on your own Loan Estimate.
Exempt does not mean cost-free. Appraisal, title, and other closing costs remain.
Common Mistakes That Cost Veterans the Exemption
- Assuming any rating gets you out automatically. The COE has to show it, or Form 26-8937 has to prove it, before closing.
- Treating a filed claim as an approved one. A pending claim means the fee is collected.
- Expecting the lender to waive it. The fee and exemption are set by federal law and VA. Lenders only document status.
- Expecting the refund to arrive on its own. You request it.
- Thinking a cash-out caps at 90%. The VA ceiling is 100% of reasonable value. Some lenders set a lower limit as their own overlay, but that is not a VA rule.
Key Terms Defined
Funding fee: A one-time VA charge on most VA loans, which can be financed into the loan.
Certificate of eligibility (COE): The VA document that confirms your eligibility and shows your funding fee status.
VA Form 26-8937: The form a lender uses to verify your VA benefits when the COE is out of date.
Residual income: The money left each month after debts, taxes, and set living costs, which VA treats as the controlling underwriting test.
Net tangible benefit: A concrete gain, drawn from VA’s list, that a cash-out must give the borrower.
DIC: Dependency and Indemnity Compensation, the benefit that exempts a qualifying surviving spouse.
Frequently Asked Questions
Does the funding fee exemption apply to a VA cash-out refinance?
Yes. The statute makes no distinction by loan type, so an exempt veteran is exempt on a cash-out the same way as on a purchase. The exemption removes only the fee. Appraisal, net tangible benefit, seasoning, and the 100% loan-to-value ceiling all still apply.
What if my COE says Non-Exempt but I receive disability compensation?
Give your lender your VA award letter. The lender submits VA Form 26-8937 to VA, and VA updates your status. Do this before closing. If the status is not verified by then, the fee gets collected and you would have to request a refund.
Can I get the fee back if my claim was pending at closing?
Possibly. A refund is available if VA later awards compensation with an effective date that is retroactive to before your closing. The decision date alone does not count. You have to request the refund yourself through your mortgage holder or the VA Regional Loan Center.
Does a surviving spouse qualify?
Yes, if the spouse is receiving DIC. Proof of the award is what matters.
How do I know the fee was removed?
Check your Loan Estimate and Closing Disclosure. An exempt borrower should see no funding fee line. If you see one, send your COE to the lender and ask for a corrected disclosure before you sign.
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 loan itself comes through a wholesale lender, subject to lender guidelines and full file review. Nothing here is a commitment to lend.
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.
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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
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: Can a Veteran Use a VA Cash-Out to Buy Out a Partner? · How a VA Cash-Out Lender Treats a Home in Probate · How a VA Jumbo Cash-Out Counts Your Remaining Entitlement
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.