The Quick Read: The exemption is really a waiver of the VA funding fee, and it applies to cash-out refinances, purchases, and IRRRLs alike. Two documents carry the proof: the Certificate of Eligibility (COE) and your VA award letter. The lender checks the COE first, because it shows your fee status and your monthly compensation. If the COE does not say “exempt,” the award letter is the backup. Either way, VA’s records must show you receiving compensation by closing.
It Is a Fee Exemption, Not a Cash-Out Exemption
Many borrowers search for a “cash-out exemption.” That is not quite the right name. What a service-connected rating removes is the funding fee, a one-time charge VA puts on most VA-backed loans. VA explains that the fee exists because the program has no down payment or monthly mortgage insurance requirement.
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: 7.40% as of October 15, 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 does not change anything else about a cash-out. Your cash-out eligibility, the appraisal, and the loan-to-value limit all stay the same. Across the wholesale programs Lendmire places VA files with, a cash-out can reach 100% of the appraised value, including the financed fee. It refinances any loan type into VA. It also carries a net tangible benefit test and the same seasoning as an IRRRL, which is the later of 210 days from the first payment and the sixth payment.
For a first-use cash-out, the fee is 2.15%. After that, it is 3.3%. An exempt borrower pays neither. The fee is a percentage of the loan amount, not the purchase price, so waiving it shrinks the balance you borrow. It also means no interest builds on a fee you never financed.
Here is the bigger picture on the VA cash-out refinance program: the fee waiver is one lever. Residual income still decides whether the file works.
Who Is Exempt, and What Proves It
The regulation sets the test. Under 38 CFR 36.4313(e)(5), the fee is not collected from a veteran who is receiving compensation. It also exempts a veteran who would be entitled to compensation but for receiving retirement pay, and certain surviving spouses.
The rule sets no minimum rating percentage. The test is receipt of compensation, so any rating that results in compensation counts. Some sites repeat a 10% cutoff. Do not rely on that.
VA Circular 26-23-19 lists the exempt groups for lenders. This table maps each one to its proof.
| Who | Typical proof | Timing point |
|---|---|---|
| Veteran receiving compensation | COE showing exempt; award letter | Status in VA records at closing |
| Retirement pay in place of compensation | Original VA rating notice; retirement pay records | Entitlement must exist |
| Active duty, not yet discharged | Proposed or memorandum rating | Issued before closing |
| Active-duty Purple Heart | Evidence of the award | On or before closing |
| Surviving spouse receiving DIC | COE showing exempt status | DIC in place at closing |
DIC is Dependency and Indemnity Compensation, a VA benefit paid to certain surviving spouses.
The Two Documents Doing the Work
The COE. Lenders pull it through VA’s WebLGY system. The VA Lenders Handbook says the COE verifies available entitlement, exempt or non-exempt fee status, and your monthly compensation. The same chapter has lenders order the COE before the appraisal. That chapter is older, so treat the sequence as general practice and not as the last word on current VA wording.
The award letter. This is VA’s notice showing your rating and the monthly amount. It is the backup when the COE does not show your exemption. The lender wants to see three things on it: the rating, the monthly compensation, and the effective date.
A benefit summary letter is a different document. You can regenerate it from your VA account whenever you need a current one. The award letter is the original decision notice. Some borrowers hand over an old copy that predates a rating increase. A stale letter creates a mismatch, so send the most recent one.
Step by Step: Documenting It for a Cash-Out
Think of this as a short checklist that runs from your first call with a loan officer through signing day.
1. Pull your award letter. Download the current one. Confirm that the rating and monthly amount are right.
2. Tell your loan officer you receive compensation. Do it at the start, not at closing. VA tells lenders not to overlook information that could point to an exemption, but the lender can only act on what it knows.
3. Have the lender pull the COE. Read the funding fee status field. VA directs lenders to treat that status as the evidence of exemption.
4. Reconcile any mismatch. If the COE says non-exempt but your letter shows compensation, flag it immediately. The lender submits VA Form 26-8937 with proof of the rating to the VA Regional Loan Center, which returns the form with the correct status. Ask your loan officer to confirm that process with VA directly.
5. Check the Loan Estimate. Once it arrives, an exempt borrower should see no funding fee on it.
6. Check the Closing Disclosure. Verify the fee line again before you sign. The lender also submits proof of exemption with the closed-loan package.
Throughout, the appraisal runs on its own track. The exemption has no effect on it.
Your Compensation Also Counts as Income
The same rating that waives the fee also helps you qualify. VA compensation is verified on the COE, and it counts as income. Residual income is the controlling test in VA underwriting. That is the money left each month after your debts and living expenses, measured against VA’s table. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table.
Some lenders gross up non-taxable income when they calculate debt-to-income. The exact method sits in VA’s handbook, so ask your loan officer how the file treats it. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
All of this is subject to lender guidelines and full file review. The wholesale programs Lendmire places VA loans with start at a 580 decision score. VA itself sets no minimum.
Where the Rule Breaks: Edge Cases
A pending claim. A filed claim does not make you exempt. If your exempt status cannot be verified before closing, the fee is collected as if you were not exempt. VA’s circular tells lenders not to advise veterans to close and plan on a refund later.
Say your claim is granted after closing, with an effective date on or before the closing date. A refund may be possible, but it is not automatic. You would need to contact VA’s Regional Loan Center and supply your award letter and Closing Disclosure. Confirm the current process with VA before relying on it.
Retirement pay. Receiving retirement pay alone does not exempt you. The exemption applies only when you would be entitled to compensation but for that pay. Bring the original VA rating notice and your retirement pay records.
Active duty, pre-discharge. A service member is exempt only with a proposed or memorandum rating issued before closing. Without one, if closing comes before discharge, the exemption does not apply and VA will not refund the fee. Here is the catch: the rating must exist on paper, not just in the pipeline.
Purple Heart. An active-duty recipient must show evidence of the award on or before closing.
Reserve and Guard. The regulation sets higher fee tiers for Selected Reserve entitlement. The exemption covers those fees too.
Occupancy. VA loans require you to live in the home as your primary residence, so a VA cash-out does not fit a rental or investment property. The exemption rides on that same owner-occupied loan.
Scenarios in Plain Words
A rating granted last month. Your award letter is current, but the COE may not show it yet. Hand the letter to your loan officer on day one. Have the lender pull a fresh COE, and ask for a correction if the COE still reads non-exempt.
A claim still pending. Treat yourself as non-exempt for planning. The question is whether VA will record compensation before closing. If it will not, a later grant may bring a refund, but only if the effective date falls on or before closing. Some borrowers choose to wait on closing. Others accept the fee and pursue the refund. The right answer depends on how much cash-out you need and how long you can wait.
A rating that increased. Your old letter shows the lower amount. A new letter shows the higher amount. Send the new one so the income and the COE agree.
A discharge a few weeks away. Ask whether a proposed or memorandum rating exists. If it does, bring it. If it does not, the timing of your closing may decide whether you owe the fee.
Common Mistakes
- Assuming a filed claim exempts you.
- Sending an old award letter after a rating change.
- Counting retirement pay as proof.
- Waiting until closing to look at the fee line.
- Expecting the lender to waive the fee on its own. Verification runs through VA, and a lender cannot waive it.
- Believing a minimum rating percentage applies.
On the cost side, the exemption leaves the amount of cash you can take out unchanged. It only removes the fee, so you borrow a smaller balance than you would otherwise finance.
Key Terms Defined
Certificate of Eligibility (COE): VA’s document confirming your entitlement, fee status, and monthly compensation.
Funding fee: A one-time charge on VA-backed loans, which exempt borrowers do not pay.
Award letter: VA’s notice of your rating and monthly compensation amount.
Effective date: The date from which VA treats your compensation as starting. It can come before the date you receive the letter.
Residual income: The money left each month after debts and living costs, tested against a VA table.
Net tangible benefit: A test that the refinance must leave you better off in a measurable way.
Frequently Asked Questions
Do I need a minimum disability rating to skip the funding fee?
No. The regulation sets no minimum percentage. What matters is that you receive compensation, or would receive it but for retirement pay. Any rating that results in compensation can qualify, subject to VA verification.
What if my COE does not show the exemption but I get compensation?
Raise it right away. Give your lender the award letter. The lender can ask VA to correct the status. Do not wait for closing to find it.
Can I get a refund if my rating is approved after I close?
Possibly. A refund may be available if the effective date falls on or before your closing date. It is not automatic, and you must request it. Confirm the process with VA.
Does the exemption change how much cash I can take out?
Not directly. The loan-to-value limit and appraisal stay the same. The exemption only removes the fee, which shrinks the balance you would otherwise finance.
Does military retirement pay make me exempt?
Not by itself. You are exempt only if you would be entitled to compensation but for the retirement pay. Bring the original VA rating notice to show that.
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 details 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 for the home you live in.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. VA.gov: VA funding fee and closing costs
2. 38 CFR Part 36 Subpart B (eCFR)
4. VA Lenders Handbook, Chapter 4: Credit Underwriting
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 Condo Without VA Project Approval Get a VA Cash-Out? · 5 Myths About What VA Cash-Out Money Can Be Used For · Can You Remodel With a VA Cash-Out on an Existing VA Loan?
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.