The Quick Read: A VA cash-out does not free payment on its own, because the new loan replaces your old one, usually at a larger balance. Your disability rating helps in three specific ways. It counts as qualifying income, documented with your award letter, it is grossed up for the debt-to-income test only, and it removes the VA funding fee. Whether your monthly obligations actually drop depends on what you do with the cash.
Most people searching this want one number: how much monthly payment do I get back? There is no single number. There is a set of levers, and your rating pulls three of them. This guide walks through each lever in order, then shows where the general rule breaks.
What Does a VA Cash-Out Refinance Actually Do?
A VA cash-out refinance pays off your current mortgage and replaces it with a new VA-backed loan. The difference between the new loan and the payoff, after costs, comes to you as cash. You can refinance a conventional or FHA loan into VA this way, and the loan does not have to be a VA loan today. VA describes the product as a way to take cash from home equity to pay off debt, pay for school, or make home improvements.
Two things follow from that. First, it is one loan, not a second loan stacked on top. Second, the balance usually goes up. A bigger balance pushes the payment up unless a longer term offsets it. So “freed payment” only shows up when the cash retires other monthly obligations.
Across the wholesale programs Lendmire places VA files with, the cash-out reaches up to 100% of the appraised value, with the financed funding fee counted inside that figure. This program is for the home you live in. The VA cash-out refinance program also carries a net tangible benefit test and a seasoning requirement, both covered below.
Key Terms Defined
Net cash: The new loan amount minus your old mortgage payoff, any other liens paid off, and closing costs. That is what lands in your hands.
Funding fee: A one-time VA charge that exists because the program has no down payment and no monthly mortgage insurance. It can be financed into the loan.
Residual income: The money left each month after your debts, taxes, and living-cost estimates. VA measures it against tables set by region and household size.
Debt-to-income ratio (DTI): Your monthly debt payments divided by your gross monthly income.
Gross-up: Raising tax-free income on paper, so it compares fairly with taxable income in the DTI calculation.
Net tangible benefit: A test showing the refinance clearly helps you financially.
Seasoning: The waiting period after your current loan starts before you can refinance it.
How Does Your Disability Rating Change the Math?
Your rating changes three things directly: the fee, the income that qualifies you, and the DTI calculation. It does not change how much equity you have or how large the loan can be.
The fee. VA states you won’t pay the funding fee if you receive VA compensation for a service-connected disability. On a cash-out, the fee is 2.15% on first use and 3.3% on later use. Most borrowers finance it. So an exempt veteran carries a smaller balance and a smaller payment for the same cash out. This is the main way disability status lowers the payment directly.
Does a higher rating exempt more? VA’s wording is receiving compensation for a service-connected disability. The exemption is not described as tiered by percentage. Some lender sites say “10% or higher,” which is consistent in practice, but your Certificate of Eligibility and the lender’s file are what settle it.
The income. Disability compensation counts as qualifying income. Per the VA Lenders Handbook, it generally does not need to be documented for likelihood of continuance, and the amount is usually shown on your COE. Award-letter requirements vary by lender, so expect to hand one over.
The gross-up. Verified tax-free income can be grossed up to 125% for the DTI calculation only. Do not add non-taxable income to taxable income before grossing up. Lenders note the gross-up in the remarks on the VA loan analysis form.
Here is the catch. The gross-up lowers DTI on paper. It does not create cash. VA’s underwriting regulation puts the DTI standard at 41%, and it lists high residual income and low DTI among the compensating factors. Residual income uses your actual deposit amount, never the grossed-up one.
Residual Income Is Where Affordability Really Gets Tested
In the wholesale programs we place with, residual income is the controlling test. The 41% figure is a guideline, not a cap. A ratio above it needs residual income well above the table for your region and family size.
That is good news for a rated veteran. The same regulation says the extra supervisory justification for a DTI above 41% does not apply when the ratio is larger solely because of tax-free income. The lender notes that in the file.
Picture a veteran whose DTI looks high only because the disability income is tax-free and not yet grossed up. Once the gross-up is applied, the ratio often drops into the standard range. If it does not, strong residual income can carry the file. Either way, the lender looks at what you keep each month, not just the ratio.
How the Loan Is Underwritten, Step by Step
1. Certificate of Eligibility. VA decides eligibility. You can get the COE through your lender, VA.gov, or by mail, per VA’s home loan page.
2. Existing lien. A VA cash-out refinances an existing mortgage or lien. It is for your primary home.
3. Income documents. Award letter, COE, and the usual pay and asset records for the rest of your income.
4. Credit. VA sets no minimum score. The wholesale programs we use start at a 580 decision score. Some lenders set a higher floor.
5. Appraisal. The appraiser sets the reasonable value. Your loan size and LTV are measured against it.
6. Net tangible benefit test. The loan must be in your financial interest. The regulation lists several ways to pass, and the lender must give you the test results early and again at closing.
7. Residual income and DTI. The lender runs both with the new payment and grossed-up disability income.
8. Closing. The Loan Estimate and Closing Disclosure show the funding fee, or its absence.
Program figures are subject to lender guidelines and full file review. Nothing here is a commitment to lend.
Where the Cash Goes Decides the Payment
This is the part most pages skip. Take two veterans with the same home, the same payoff, and the same appraised value. One is fee-exempt. One is not.
The exempt veteran has no funding fee to finance. The loan balance is lower by that fee percentage. Net cash is the same if both borrow to the same target, but the exempt veteran’s payment is smaller because the balance is smaller. If both borrow the maximum, the exempt veteran leaves a little more room under the 100% ceiling, which means a little more cash.
The fee is also the reason the ceiling matters. On a cash-out, the financed fee counts inside the 100% limit. A non-exempt borrower pays for it in either cash or reduced proceeds. An exempt borrower does not.
Now the “frees” part. Say you use the cash to retire several high-cost monthly obligations, such as car loans or credit cards. Those payments disappear. The mortgage payment rises, but total monthly obligations can fall. That is the only path to real monthly relief, and it is a trade. You are turning unsecured debt into debt secured by your home. The CFPB’s research on cash-out refinances found that paying off other bills or debts was the most common reason borrowers took cash out. It also warns that this conversion can put the home at risk.
Here is a decision table.
| Use of cash | Effect on monthly budget | Watch for |
|---|---|---|
| Pay off high-cost debts | Total obligations can drop | Debt can reappear |
| Home improvements | Payment rises | May add value |
| Take less than the maximum | Smaller balance | Less cash on hand |
| Borrow the maximum | Largest payment rise | Thin equity cushion |
Borrowing less than the ceiling is often the smarter move. The ceiling is a limit, not a goal.
Does a 100% or Permanent and Total Rating Change Anything?
It changes less than people expect. The fee exemption does not depend on whether you are rated 10% or 100%. Where a higher rating matters is income. More monthly compensation means more qualifying income, a better residual income picture, and a stronger DTI after gross-up.
For permanent and total status, or unemployability ratings, VA’s published rules do not set out any special loan treatment. The benefit is better described as stability. A lender gets more comfort when income is unlikely to change.
What about a rating that is reviewable or temporary? Lenders look at the award letter for any scheduled review. Lender practice varies here, so ask early.
Where the General Rule Breaks
Pending rating. If your claim is pending at closing, the lender needs VA verification, and the loan may not close until VA responds. You cannot assume the exemption. Whether a refund is available after a retroactive award is something to confirm directly, so ask VA and your loan officer before you decide whether to wait or close.
Other exempt groups. VA’s page lists more than compensation recipients. Retirement-pay cases, Purple Heart recipients on active duty, and surviving spouses receiving DIC are covered. Confirm the full list on VA’s funding fee page.
Not all tax-free income is alike. VA pension, military retirement pay, and civilian disability retirement have different tax treatment. Verify before grossing up anything. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
The 90% myth. VA does not cap cash-out at 90% LTV. The regulation allows 100% of reasonable value. The 90% figure is one of the ways to pass the net tangible benefit test. Many lenders add their own cap, which is why quotes differ.
Type I versus Type II. If the new loan, including the fee, does not exceed your payoff, extra recoupment rules apply. Fees and costs must be recovered within 36 months through lower regular monthly payments. If it exceeds the payoff, you are in cash-out territory.
Seasoning. The cash-out carries the same seasoning as the IRRRL: the later of 210 days from the first payment and the sixth payment.
Loan size. With full entitlement, there is no VA loan limit. With remaining entitlement, a down payment may be required. Speak with a loan officer rather than guessing.
Property Tax Relief and Escrow
Many states reduce property taxes for disabled veterans. If yours does, the escrowed monthly payment on the new loan may be lower. This is a real lever, but it is set by your state and county, not by VA. Confirm your exemption is in place before the appraisal and escrow setup so it shows in the payment.
Common Mistakes
- Assuming the gross-up adds cash. It does not. Residual income uses real deposits.
- Treating 41% DTI as a wall.
- Assuming a cash-out always lowers payment. It rarely does unless debt is retired.
- Borrowing the maximum without a plan for the cash.
- Closing with a pending rating and assuming a refund is automatic.
- Ignoring closing costs. VA warns they can add up to thousands of dollars.
What Your Documents Checklist Looks Like
- VA award letter showing your compensation amount
- Certificate of Eligibility
- Payoff statement for your current mortgage
- Statements for any debts you plan to retire
- Pay and asset records for non-VA income
- Proof of any state property tax exemption
Where This Leaves You
Compare the new total obligation to your old one, not the mortgage payment to the mortgage payment. If the cash retires costly monthly debt and you skip the fee, the picture can improve. If the cash goes to a purchase, the payment goes up. If you want to see how the fee itself moves the balance, Lendmire’s piece How Much a VA Cash-Out Funding Fee Adds to Your Monthly Payment covers it, and the companion on how the fee exemption changes cash and payment shows the exempt side.
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.
Frequently Asked Questions
Does my disability rating percentage change how much cash I get?
No, not directly. Cash depends on your appraised value, your payoff, and the loan ceiling. The rating affects the fee exemption, your qualifying income, and your residual income, which can influence how much you can comfortably borrow.
Does the funding fee waiver apply to a cash-out refinance?
Yes. VA’s exemption for veterans receiving compensation for a service-connected disability covers the funding fee, which on a cash-out would otherwise be 2.15% on first use and 3.3% on later use. Confirm exempt status on your COE.
What if my rating is still pending when I want to close?
The lender needs VA verification, and the loan may not close until VA responds. Do not assume the fee is waived. Ask VA and your lender whether a refund is possible if the rating is later awarded retroactively.
Does disability income count as qualifying income?
Yes. It generally does not need to be documented for continuance, and it can be grossed up to 125% for the DTI calculation only. Residual income uses the actual amount you receive.
Can I refinance a non-VA loan this way?
Yes. A conventional or FHA loan can be refinanced into a VA-backed loan, with up to 100% of appraised value including the financed fee. Seasoning and the net tangible benefit test still apply, subject to lender guidelines.
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.
For the program’s current guidelines, see VA loan programs.
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References
1. VA – Cash-out refinance loan
2. VA – Funding fee and closing costs
6. CFPB – Cash-out refinance and paydown research
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 the Fee Exemption Changes Cash and Payment on a VA Cash-Out · Can a Veteran Do a VA Cash-Out Within the First Year? · VA IRRRL vs VA Cash-Out for a Veteran Who Wants Some Cash Back
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.