Subsequent User Cash-out Refinance Funding Fee

Yes, VA guidelines allow you to include the costs of energy efficiency improvements (EEMs) into your Cash-Out Refinance. You can borrow up to $6,000 for approved improvements, such as solar heating systems, insulation, or storm windows, in addition to the standard loan amount. The calculations for the maximum loan amount allow for 100% of the appraised value, plus the cost of these energy improvements, plus the VA funding fee. The funding fee percentage is calculated on the total loan amount, including the cost of the improvements. This allows you to upgrade the home’s efficiency without needing upfront capital, though it increases your overall debt load.

If you pay the 3.6% funding fee at closing but are later awarded service-connected disability compensation with an effective date that is retroactive to a date prior to your loan closing, you are entitled to a refund. If you paid the fee in cash, the refund is issued directly to you. If you financed the fee into your loan balance, the refund must be applied as a principal reduction to your mortgage; you generally cannot receive it as cash. It is crucial to contact the VA Regional Loan Center if you receive a retroactive disability rating to initiate this refund process.

Lenders verify your funding fee status by obtaining your Certificate of Eligibility (COE) from the VA’s online system. The COE will indicate your entitlement status and whether you have used the benefit previously. If your entitlement code shows a “5” or if there is a loan number listed in the “prior loans” section, you are considered a subsequent user. Even if you have paid off your previous VA loan in full and sold the property to restore your entitlement, the fact that you utilized the benefit in the past dictates that the subsequent use rate of 3.6% applies to your new cash-out refinance.

Yes, refinancing a non-VA loan (such as a conventional or FHA mortgage) into a VA-guaranteed loan is classified as a Cash-Out Refinance, even if you are not taking actual “cash” out of the transaction. Because the new loan is paying off a lien that is not currently VA-guaranteed, it does not qualify for the lower-cost IRRRL program. Therefore, if you have used your VA benefit previously on a different property, you will be subject to the subsequent use funding fee of 3.6%. You must weigh this fee against the benefits of the VA loan, such as the elimination of monthly mortgage insurance.

Federal law mandates different funding fee rates based on a borrower’s history with the VA Home Loan program. The funding fee is designed to defray the costs of the program and mitigate the risk of loss to the government, as VA loans require no mortgage insurance. First-time users are charged a lower rate (2.3% for cash-outs) to make entry into homeownership or initial refinancing more affordable. Subsequent users are charged a higher rate (3.6%) because they have already successfully utilized the benefit once. This higher premium for repeat customers helps ensure the program remains financially viable and solvent for future first-time homebuyers and Veterans entering the system.

The statutory exemptions for the VA funding fee apply to Cash-Out Refinances just as they do for purchase loans. You are exempt from paying the 3.6% fee if you are receiving VA compensation for a service-connected disability, or if you would be entitled to receive such compensation if you were not receiving retirement pay. Additionally, surviving spouses of Veterans who died in service or from service-connected disabilities are exempt. Active duty Service members who have been rated eligible for compensation via a pre-discharge exam are also exempt. If you fall into any of these categories, the funding fee is waived entirely, saving you thousands of dollars.

You are not required to pay the VA funding fee in cash at the closing table, though you have the option to do so. The vast majority of borrowers choose to finance the fee by rolling it into their loan amount. VA regulations allow you to borrow up to 100% of the property’s reasonable appraised value, plus the cost of the funding fee and any energy efficiency improvements. This means your total loan balance can technically exceed the fair market value of the home. While financing the fee reduces upfront costs, it means you will pay interest on that 3.6% charge for the life of the loan.

There is a substantial difference in cost between a Cash-Out Refinance and an Interest Rate Reduction Refinance Loan (IRRRL). An IRRRL, often called a streamline refinance, carries a flat funding fee of only 0.5%, regardless of whether it is your first or subsequent use of the benefit. In contrast, the subsequent user Cash-Out Refinance fee is 3.6%. The trade-off is that an IRRRL generally prohibits you from receiving cash proceeds at closing; it is strictly for lowering your interest rate or changing terms. If you need to liquidate equity for debt consolidation or home improvements, you must pay the higher Cash-Out premium.

No, unlike VA purchase loans, a VA Cash-Out Refinance does not offer a tiered funding fee structure based on equity or down payment amounts. For purchase transactions, a borrower can reduce their funding fee percentage by making a down payment of 5% or 10%. However, this provision does not apply to Cash-Out Refinancing loans. Whether you borrow 100% of the home’s appraised value or only 50%, the funding fee for a subsequent user remains fixed at 3.6%. Consequently, leaving equity in the property will lower your principal balance and monthly payment, but it will not reduce the percentage charged for the VA funding fee.

For a Veteran who has previously used their VA home loan benefit, the funding fee for a Cash-Out Refinance is currently set at 3.6% of the total loan amount. This rate applies regardless of how much equity you maintain in the property or how much cash you choose to extract. The “subsequent use” classification is triggered because you have already utilized your home loan eligibility on a prior transaction. This fee is significantly higher than the rate for first-time users, which is set at 2.3%, reflecting a statutory requirement to charge repeat users a higher premium to help sustain the loan guaranty program for future generations of Veterans.