VA Cash-Out Refinance Type I Vs Type II — The Quick Read: Type I is for a veteran who wants to swap a non-VA loan for a VA loan without borrowing more than the payoff. Type II is for a veteran who wants extra cash on top of the payoff. Both are cash-out refinances in VA’s eyes, both need an appraisal, and both use the VA cash-out program. The dividing line is simple: does the new loan, funding fee included, stay at or under the old payoff?
Here is the honest version. If your goal is to get out of an FHA or conventional loan and into VA terms, Type I is usually the cleaner path. You borrow no more than you owe. If you need cash for repairs, debt, or another goal, Type II is the one that delivers it. It also adds debt equal to the cash you take.
Neither is a streamlined refinance. An IRRRL (interest rate reduction refinance loan) only works on an existing VA loan. A non-VA loan cannot use it, which is why this topic exists at all.
Key Terms Defined
Payoff: The amount needed to close out your current loan, including what you owe on it.
Funding fee: A one-time VA charge that can be financed into the loan. It is waived for veterans receiving compensation for a service-connected disability and for other exempt groups.
Reasonable value: The home’s value as set by the VA appraisal. It is the yardstick for how much you can borrow.
Net tangible benefit (NTB): A test showing the new loan actually helps you. It is required on every VA cash-out refinance.
Seasoning: A waiting period or payment history requirement before you can refinance.
Residual income: What is left of your monthly income after your major obligations and living costs. It is the controlling test in VA underwriting.
Certificate of Eligibility (COE): The VA document that confirms you qualify for the benefit.
Side-by-Side
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or under payoff | Over payoff |
| Cash to you | None | Yes, the excess |
| Leverage ceiling | Up to 100% of appraised value | Up to 100% of appraised value |
| Mortgage insurance | None on VA loans | None on VA loans |
| Occupancy | Your own home | Your own home |
| Appraisal | Required | Required |
| Documentation | Full: credit, income, residual income | Full: credit, income, residual income |
| Credit floor | 580 decision score on the wholesale programs Lendmire uses | Same |
| Equity change | Stays about the same | Shrinks by the cash taken |
Both types carry the same funding fee schedule: 2.15% for first use and 3.3% for subsequent use, unless you are exempt. Program figures are subject to lender guidelines and full file review.
What Makes a Loan Type I or Type II?
One comparison decides it. Take the payoff of the loan you are replacing. Then take the new loan amount, with the VA funding fee included. VA’s Circular 26-19-5 sorts refinances this way. A new loan at or below the payoff is Type I. A new loan above the payoff is Type II.
That is the whole test. No one has to pick a “type” from a menu. The lender’s system calculates it from the numbers.
This trips people up in one specific way. Because the funding fee counts toward the new loan, a Type I that finances the fee can drift into Type II if the fee pushes the total above the payoff. Your loan officer will run both versions so you see where the line falls.
Why a Non-VA Borrower Ends Up Here
Veterans with FHA or conventional loans often ask about the IRRRL because they heard it is simple. It is simple, but it only refinances a VA loan into another VA loan. If your current loan is not VA-backed, you need the cash-out refinance, even if you want no cash at all.
The program also refinances any loan type into VA. Across the wholesale programs Lendmire places VA files with, that includes FHA, conventional, and other non-VA mortgages. The VA cash-out refinance program reaches up to 100% of the appraised value, funding fee included. VA’s own loan guaranty rule, 38 CFR 36.4306, sets that 100 percent ceiling and requires a net tangible benefit.
One more requirement: there must be an existing lien. A home with no mortgage on it cannot use this program.
Key Takeaways
- Type I: new loan at or under the payoff. No cash to you. Best for changing loan programs.
- Type II: new loan over the payoff. Cash to you. Best when you need the equity.
- Only the IRRRL is VA-to-VA, so a non-VA loan goes through the cash-out program.
- Both types need an appraisal, full underwriting, and a net tangible benefit.
When Type I Is the Better Fit
Type I fits when the point is the loan itself, not the cash. Picture a veteran with an FHA loan carrying monthly mortgage insurance. The home has gained value. Moving to VA removes mortgage insurance entirely, since VA loans carry none. That alone can be the net tangible benefit.
Say you have a conventional loan and want to move from adjustable to fixed. Or you want a shorter term. Those are also recognized paths under the regulation. Type I lets you do that without increasing what you owe beyond the payoff.
It also leaves your equity largely intact. You are not turning home value into new debt. That matters if you plan to sell within a few years or want a cushion against a soft market.
Here is the catch. Type I still costs money to do. VA warns that closing costs can reach into the thousands, and the funding fee is real even when financed. A Type I only makes sense if the benefit outweighs those costs. Ask your lender to walk you through the comparison, since VA requires a loan comparison disclosure on every cash-out.
Type I also fits borrowers who simply want to start fresh on VA terms. If you bought with FHA years ago because you lacked a down payment or hadn’t used your benefit, the VA loan may now offer better terms.
When Type II Is the Better Fit
Type II fits when you have a real use for the equity. Common examples are paying off higher-cost debt, funding a repair or remodel, or paying off a non-VA loan and a second lien together. Other recorded liens, like a second mortgage, can often be paid off in the same refinance.
The tradeoff is plain. Cash out is added to the new loan, which raises the balance. VA’s own consumer guidance points out that a larger balance means higher monthly principal and interest, and interest piles up on the cash you took over the life of the loan. Spreading short-term debt across a long term can cost more overall, even if the monthly budget feels lighter. VA suggests talking to a financial advisor first.
Type II also shrinks your equity by the amount you take. And because the appraisal sets the ceiling, a low value reduces what you can borrow. If the numbers push the loan above 100 percent of reasonable value, you pay the excess in cash at closing. You cannot finance it.
If you are weighing this against other ways of using equity, our look at whether to cash-out refinance to pay off debt covers the debt side of the question.
The Net Tangible Benefit Test, Plainly
The new loan has to leave you better off in a way VA recognizes. The regulation lists several qualifying paths, including eliminating monthly mortgage insurance, moving to a shorter term, lowering the interest rate, converting an adjustable loan to fixed, refinancing an interim construction or repair loan, and a new loan at or below 90 percent of reasonable value. VA also lists improving your monthly residual income as one of the NTB paths.
Two things to know. First, that 90 percent figure is a benefit path, not a loan cap. The old 90 percent cap is gone. The 2018 Federal Register rule aligned VA’s regulation with the 100 percent limit set by statute. Second, a lender may set its own lower limit even though VA allows 100 percent. VA allows it; no lender has to offer it.
For a non-VA to VA Type I, VA’s guidance lists at least one net tangible benefit as the requirement. That is why FHA borrowers with monthly mortgage insurance so often land here. It is the easiest benefit to document.
Seasoning and Edge Cases
Here is where sources disagree, so the honest answer is to ask your lender. VA’s seasoning rules are written around refinancing a VA-guaranteed loan. On the wholesale programs Lendmire works with, VA seasoning means the later of 210 days from the first payment and the sixth payment. Whether and how that applies to a non-VA loan depends on lender guidelines. Some lenders also want a payment history on the loan you are replacing.
A few other edge cases worth knowing:
- Fixed to adjustable. Moving from a fixed-rate loan to an adjustable one can bring a lower leverage limit. Confirm with your lender before choosing that structure.
- Construction loans. Refinancing a construction loan falls under the cash-out rules whether or not the principal changes.
- Occupancy. The home must be your own residence. For active-duty members, a spouse or dependent can satisfy occupancy. It is not for investment properties.
- Entitlement. Loan size depends on your entitlement. With full entitlement, there is no VA loan limit. With remaining entitlement, speak with a loan officer about what applies to you.
Common Misconceptions
“Cash-out means I must take cash.” No. A Type I takes none, yet it is still a cash-out category loan.
“I need a VA loan already.” No. That is the IRRRL. The cash-out refinances any loan type into VA.
“It works like an IRRRL: no appraisal, light paperwork.” It does not. You need an appraisal, the NTB test, and full documentation.
“VA caps cash-out at 90 percent.” That is outdated. The cap is 100 percent of reasonable value.
“A paid-off home qualifies.” It does not. There must be an existing lien.
How to Choose
Run through four questions.
First, do you need cash? If no, Type I is the likely path. If yes, Type II.
Second, is there a clear net tangible benefit? Dropping mortgage insurance is the clearest one for FHA and many conventional borrowers.
Third, how much does the funding fee move the total? If financing it tips a Type I over the payoff, you have a Type II whether you meant to or not. You can sometimes pay part of the fee in cash to stay under.
Fourth, what does your residual income look like? VA underwriting turns on it. The 41 percent debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table. Across the wholesale programs we place files with, a 580 decision score is the starting floor, though VA itself sets no minimum.
The Balanced Verdict
Type I is the quieter, more conservative move. You change programs, often drop mortgage insurance, and keep your equity. Type II is a bigger financial decision. It converts equity into cash and into debt that you will carry and pay interest on for years.
Neither is better in the abstract. Type I fits the veteran whose main problem is the loan they have. Type II fits the veteran with a specific, worthwhile use for the money. Both are reviewed subject to lender guidelines, credit, and a full file review, and neither 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.
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
Can I use an IRRRL to refinance my FHA loan into a VA loan?
No. The IRRRL is VA-to-VA only. A non-VA loan, such as FHA or conventional, goes through the VA cash-out refinance. That is true even if you do not want any cash out.
Does a Type I VA cash-out refinance give me any cash?
No. A Type I keeps the new loan at or below the payoff of the old one, funding fee included. It still requires an appraisal, a net tangible benefit, and full underwriting. The purpose is changing the loan, not receiving money.
How much can I borrow on a Type II?
Up to 100 percent of the appraised value, with the funding fee included, on the wholesale programs Lendmire places VA loans with. Any portion of the fee that pushes the loan over that point must be paid in cash at closing. Individual lenders may set lower limits, so confirm yours.
Will I pay mortgage insurance on a VA cash-out refinance?
No. VA loans carry no mortgage insurance of any kind. There is a funding fee instead, which can be financed. It is 2.15% for first use and 3.3% for subsequent use, and it is waived for exempt veterans, including those receiving disability compensation.
Does my credit have to be perfect?
No, but there is a floor. VA sets no minimum score itself. The wholesale programs Lendmire works with start at a 580 decision score. Residual income is the controlling test, and every file is subject to lender guidelines.
For the program’s current guidelines, see a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, USDA and HUD-184 purchase loans with down payment assistance options through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
2. VA News: You could be losing thousands on your home loan
3. Federal Register: Revisions to VA-Guaranteed or Insured Cash-Out Home Refinance Loans
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: VA Cash-out Refinance: How The 100 Percent Ceiling Really Works
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.