The Quick Read: A surviving spouse who receives Dependency and Indemnity Compensation (DIC) owes no VA funding fee on a cash-out refinance. The exemption follows the person, not the loan type, so it applies to a cash-out the same way it applies to a purchase. It is not automatic, though. Status has to show on the Certificate of Eligibility (COE) and be settled before closing.
Key Takeaways
- The exemption rests on a service-connected death and, in practice, on actually receiving DIC. Being widowed by a veteran is not enough on its own.
- For a cash-out refinance, the fee is 2.15% on first use and 3.3% on later use. An exempt spouse pays neither.
- Exemption status should be confirmed before the Loan Estimate is relied on, not discovered at the closing table.
- A fee charged in error is refunded by VA to the borrower, but only when the paperwork is clean.
- Cash-out is still a full-underwriting loan. The exemption removes the fee. It does not relax the credit, appraisal, or residual income review.
What Does the Surviving-Spouse Exemption Actually Say?
Federal law bars VA from collecting a funding fee from the surviving spouse of a veteran who died from a service-connected disability. 38 USC 3729 puts that in subsection (c). The same subsection also exempts disabled veterans and, through Public Law 116-23, active-duty Purple Heart recipients.
VA’s own procedure narrows the practical test. VA Circular 26-23-19 lists the exempt group as a surviving spouse of a veteran who died from a service-connected disability and who is in receipt of DIC. That “in receipt of” language is where most confusion starts.
Some web pages describe the exemption more loosely, as covering any unremarried spouse of a veteran who died in service or from a service-connected condition. Read the primary sources and the picture is tighter. The statute sets the category. VA’s circular ties the fee waiver at the lender’s desk to DIC receipt. When a file lands in a gray area, the COE and VA’s benefit verification decide it, not a general description.
How Does This Work on a Cash-Out Refinance?
The fee for a VA cash-out refinance is 2.15% of the loan on first use and 3.3% on subsequent use. Those are the figures across the wholesale programs Lendmire places VA loans with. The fee is normally financeable, meaning it rides inside the new balance instead of coming out of pocket.
That financing feature is why the exemption matters so much on a cash-out. The VA cash-out can reach 100% of the appraised value, including a financed fee. On a non-exempt borrower, part of that ceiling is consumed by the fee itself. For an exempt surviving spouse, the fee line is zero, so the new balance is smaller for the same cash to the borrower. Less balance means less interest over the life of the loan and more equity left in the house.
Picture a surviving spouse with a home worth a given amount who wants to pull out the same cash twice, once as an exempt borrower and once as a non-exempt one. The exempt loan comes in lower by exactly the amount of the fee that would have been financed. No dollar figure is needed to see the direction. A 2.15% or 3.3% charge on the entire new loan balance is a large one-time cost, and the exemption removes it.
The VA cash-out program is covered in more detail on Lendmire’s VA cash-out refinance program page. It refinances any loan type into a VA loan, and it carries the same seasoning and net tangible benefit requirements as other VA refinances.
Step by Step: Claiming the Exemption
Think of this as a sequence. Skipping a step is how an exempt borrower ends up paying a fee.
1. Confirm VA home loan eligibility. The surviving spouse must qualify for the benefit. Under 38 USC 3701(b)(2), the deceased veteran’s service is treated as the spouse’s service. Eligibility is VA’s call, made through the COE.
2. Confirm DIC. Check that DIC is actually being paid, not just applied for. This is the trigger in VA’s procedure.
3. Order the COE. The lender reviews exemption status on the COE or VA’s benefit verification. Per the circular, lenders can print that verification at any point during origination.
4. Gather documents. Practitioners typically ask for the DIC award letter, the marriage certificate, and the veteran’s death certificate. Which documents a given lender wants can vary.
5. Underwrite the cash-out. Exempt or not, this is a full file: appraisal, income, credit, and residual income. Residual income is the controlling test on VA loans. The 41% debt-to-income figure is a guideline, not a cap, and a ratio above it needs residual income well above the table.
6. Check the disclosures. The Loan Estimate and the Closing Disclosure should show no funding fee. If a fee line appears, raise it before signing.
One practical note from placing these files: DIC is income, and lenders can consider it when qualifying. Whether and how it counts depends on lender policy and VA guidance, so ask early rather than assuming.
Which Situations Are Exempt and Which Are Not?
| Situation | Exempt from fee? | What supports it |
|---|---|---|
| Spouse of veteran who died of service-connected cause, receiving DIC | Yes | DIC award letter, COE |
| Co-borrower spouse doing an IRRRL, no DIC | No | VA Circular 26-23-19 |
| Spouse of veteran whose death was unrelated to service, no DIC | Generally no | No qualifying category |
| Spouse with DIC claim still pending | Not until DIC is in place | Award status on COE |
The second row surprises people. The circular says a surviving spouse who was a co-borrower on the VA loan can use an IRRRL, but is not considered exempt unless in receipt of DIC. Eligibility for the loan and exemption from the fee are separate questions.
Where the General Rule Breaks
Pending DIC claims. The exemption turns on receipt, so a claim still under review does not by itself remove the fee. A borrower closing before the award posts may be charged. If DIC is later granted, the circular describes a refund path, which is covered below. Whether it makes sense to wait for the award before closing depends on how urgent the cash need is, and that is a real tradeoff worth weighing with a loan officer.
Remarriage. Secondary sources say the exemption goes to unremarried surviving spouses. The remarriage rules live in 38 USC 3701(b)(2) and the VA Lenders Handbook, and age or date thresholds should be verified against those, not against a summary. A spouse who has remarried or plans to should get that answered before applying.
Assumptions. The fee also does not apply when a qualifying surviving spouse assumes a loan. Under 38 CFR 36.4254, the 0.5% assumption fee is not collected from that spouse. Different transaction, same protective logic.
Veteran in your own right. A surviving spouse who also served may qualify through their own service. That can change which exemption applies and how entitlement is used. Don’t assume one path. The COE shows which one the file runs on.
Financial hardship. There is no general hardship waiver. The statute lists specific exempt categories, and a tough financial situation is not one of them.
Historical rules. An old provision under 38 CFR 36.4504 waived a 1% fee for surviving spouses on loans from the mid-1980s. It is not the current fee and should not be quoted as one.
What Happens If the Fee Was Charged by Mistake?
Fees charged in error are refunded, but the mechanics matter. The circular says VA issues the refund directly to the veteran or surviving spouse. It also warns that incorrectly entered or poorly documented refund requests may result in the refund being directed to the veteran. For a surviving spouse, that is a nasty snag. The money can go to the wrong place.
The circular also says exemption status should be established before closing, and that keeping it current avoids incorrect charges to exempt borrowers. The safest reading is VA’s general direction: settle status first.
The lesson is simple. A refund is a repair, not a plan. Bring the DIC letter at the start, and check the fee line on the Loan Estimate before anything else.
Common Myths
“Every surviving spouse is exempt.” No. The statute ties the exemption to a service-connected death, and VA’s circular ties it to DIC receipt.
“It only applies to purchases.” No. The statute waives the fee for the person, not the loan type, so it reaches cash-out refinances too.
“The lender will catch it.” Don’t count on it. The verification burden sits before closing, and the borrower holding the DIC letter is the best-positioned person to raise it.
“The funding fee is mortgage insurance.” It is not. VA loans carry no monthly mortgage insurance. The funding fee is a one-time charge, and it can be financed.
“A refund fixes it painlessly.” Only with accurate documentation, and even then the money can be misdirected.
Cash-Out Versus Streamline for a Survivor
Both can exist for the same borrower, and the exemption works differently around them.
| Factor | VA Cash-Out | IRRRL |
|---|---|---|
| Purpose | Pull equity, or move any loan type into VA | Lower payment or move from adjustable to fixed |
| Standard fee | 2.15% first use, 3.3% after | 0.5% |
| Appraisal | Yes | No VA appraisal |
| Exempt spouse pays fee? | No, if DIC-exempt | No, if DIC-exempt |
The IRRRL is available only on an existing VA loan and requires a net tangible benefit. Cash-out is the tool when the goal is equity, or when the current loan isn’t a VA loan at all. Which one fits depends on whether the borrower needs cash or only a better loan structure. An exempt spouse who simply wants a smaller payment may find the streamline cleaner. One who needs funds for repairs, debt payoff, or a major expense is looking at cash-out.
Key Terms Defined
Dependency and Indemnity Compensation (DIC): A monthly VA benefit paid to certain survivors of veterans who died from service-connected causes.
Funding fee: A one-time VA loan charge, financeable into the loan, that is waived for exempt groups.
Certificate of Eligibility (COE): The VA document that confirms entitlement and shows exemption status.
IRRRL: The VA streamline refinance of an existing VA loan, with no VA appraisal.
Net tangible benefit: VA’s requirement that a refinance leave the borrower measurably better off.
Residual income: The money left each month after major obligations, which is the controlling VA test.
What the Decision Looks Like in Practice
For most surviving spouses, the decision comes down to three questions. Is DIC in place today? Does the goal require cash, or just a better loan? And does the credit and income picture clear full underwriting?
The wholesale programs Lendmire works with start at a 580 decision score, and VA itself sets no minimum, so lender floors vary. Occupancy also matters, since the VA cash-out is built for the home the borrower lives in. Everything here is subject to lender guidelines and a full file review, and none of it is a commitment to lend.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
A word on scope. This article covers the VA funding fee only. It does not address property-tax exemptions, estate-tax portability, or home-sale gain exclusions, which turn up in searches for similar phrases and follow entirely different rules.
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. Related reading: Lendmire’s piece VA Cash-Out Funding Fee Rules for First or Subsequent Use.
Frequently Asked Questions
Is the funding fee exemption automatic for a surviving spouse?
No. Status has to be established through the COE or VA’s benefit verification, and the circular says it should be settled before closing. Bring the DIC award letter at the start of the process so the lender can confirm it and keep the fee off the Loan Estimate.
Does the exemption apply to a cash-out refinance, or only a purchase?
It applies to both. The statute waives the fee for the person, regardless of loan type. On a cash-out, that removes a 2.15% first-use or 3.3% later-use charge that would otherwise be financed into the new balance.
What if my DIC claim is still pending?
The exemption turns on actually receiving DIC, so a pending claim may not remove the fee at closing. If DIC is awarded later, VA has a refund process, but it needs accurate documentation. Whether to wait or proceed is a timing decision worth discussing with a loan officer.
Does remarriage affect the exemption?
Yes, it can. Secondary sources describe the exemption as going to unremarried surviving spouses, with the detail in 38 USC 3701(b)(2) and the VA Lenders Handbook. Confirm your specific situation with VA or a loan officer before relying on it.
Can a co-borrower surviving spouse skip the fee on an IRRRL?
Only with DIC. The circular says a co-borrower spouse can use an IRRRL but is not considered exempt unless receiving DIC. Without it, the standard 0.5% IRRRL fee would apply.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. 38 USC 3729
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: How Much Cash a VA Cash-Out Releases After the Payoff and the Fee · Can a VA Cash-Out Ever Skip the Appraisal? · How Much the Fee Exemption Changes Cash and Payment on a VA Cash-Out
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.