The Quick Read: It depends on your loan, your equity and your plans for the VA benefit. A VA cash-out refinance fits borrowers who want to reach more equity, drop monthly mortgage insurance, or move to a different term. Staying conventional fits borrowers whose current loan already works, who need little or no cash, or whose mortgage insurance is close to ending. The right answer comes from your balance, your entitlement plans and the file review.
Most first-time VA users in this spot already own the home. They hold a conventional loan and wonder whether to spend their VA benefit on a refinance. Two paths exist. Path A is a VA-backed cash-out refinance that replaces the conventional loan. Path B is staying conventional, which means keeping the loan you have, doing a conventional cash-out refinance, or using a separate home equity product.
The VA path suits owner-occupants who want high leverage and no monthly mortgage insurance. The conventional path suits borrowers who value the loan they already have, or who want to keep the VA benefit untouched for a later purchase. Neither one wins every file.
Lendmire is a mortgage broker that arranges the VA cash-out refinance program through wholesale lenders, and the mechanics below come from files placed through those programs. Every figure is subject to lender guidelines and full file review, and none of this is a commitment to lend.
Side-by-Side
| Factor | VA cash-out refinance | Staying conventional |
|---|---|---|
| Leverage | Up to 100% of appraised value, fee included | Lower cap on cash-out; varies by lender |
| Credit floor | 580 decision score on wholesale programs | Set by lender and loan type |
| Mortgage insurance | None monthly | Often required at higher LTV; cancellable later |
| Occupancy | You must live in the home | Primary, second home or investment, at differing caps |
| One-time fee | VA funding fee, waived for exempt veterans | No VA fee; lender costs apply |
| Income test | Residual income controls | Debt-to-income leans heavier |
| Entitlement | Uses first-time benefit | No effect on VA entitlement |
| Loan limit | None with full entitlement | Conforming or jumbo limits apply |
How Does a VA Cash-Out Refinance Work for a Conventional Borrower?
A VA cash-out refinance replaces your current loan with a new VA-backed loan. VA describes the product as a way to take equity out or to move a non-VA loan into a VA-backed one. You need a Certificate of Eligibility, you must meet VA and lender standards for credit and income, and you must live in the home.
The name misleads people. Cash out is the route into the VA program for a conventional loan, but a borrower does not have to take a large check. Some files use it mainly to change the loan structure.
Across the wholesale programs this lane uses, the figures work like this:
- The new loan can reach 100% of the appraised value, including the financed funding fee.
- No monthly mortgage insurance applies.
- A first-time user has full entitlement, so VA sets no loan limit. The lender and the appraisal still cap the amount.
- The wholesale programs start at a 580 decision score. VA itself sets no minimum, but lenders do.
- Residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. A higher ratio needs residual income well above the table.
VA’s own lender materials set the 100% ceiling for cash-out refinances and list the added requirements: the loan-to-value test, a net tangible benefit, a comparison disclosure and seasoning. Lenders may set a lower cap than VA does. So “VA allows 100%” does not mean every file reaches 100%.
What Is the Net Tangible Benefit Test?
The net tangible benefit test asks whether the new loan is in your financial interest. Federal regulation requires it. The lender gives you the test and the comparison before closing, and the loan has to pass it.
It is not a rate test alone. VA lists several ways to pass. Eliminating monthly mortgage insurance is one. Others include a shorter term, a lower rate, a lower payment or higher monthly residual income.
For a conventional borrower paying mortgage insurance, the insurance test is often the clearest. For a borrower with no mortgage insurance and a good loan, the test gets harder to meet. That is one reason some files stay put.
One related point trips people up. The seasoning rules for existing VA loans, and the fee recoupment test that applies when a cash-out replaces a VA-guaranteed loan, are written around VA-to-VA refinances. For a first-time user paying off a conventional loan, they generally do not apply the same way. The later of 210 days from the first payment and the sixth payment governs VA-to-VA files. Confirm how a lender applies seasoning to your specific loan.
When VA Cash-Out Is the Better Fit
A VA cash-out refinance is the stronger path in several situations. These are the profiles that tend to work.
Borrowers paying monthly mortgage insurance with limited equity. Conventional cash-out caps sit lower than VA’s. If you have less equity, VA may be the only path that reaches the amount you need without monthly insurance. Federal rules give conventional borrowers a right to remove insurance later, but that depends on your balance and payment history.
Borrowers who want to consolidate or fund a large, planned need. Home repairs, debt payoff or a major expense can justify tapping equity. The loan must still pass the net tangible benefit test, and the larger balance is real debt secured by your home.
Borrowers with solid residual income and a higher debt load. VA treats residual income as the main test and does not set a hard debt-to-income cap. Conventional underwriting leans harder on the ratio. A borrower who is strong on residual income but stretched on ratio may find VA more workable.
Borrowers exempt from the funding fee. The funding fee is one-time and reviewable. It runs 2.15% on first-use cash-out and 3.3% after. VA waives it for veterans receiving compensation for a service-connected disability, and for other exempt groups. For an exempt borrower, the main VA cost drops out of the comparison.
Borrowers with modest credit. VA sets no minimum score, and the wholesale programs begin at 580. Conventional loans often carry tighter credit requirements, depending on the lender.
A scenario: picture a homeowner with a conventional loan and monthly mortgage insurance, moderate equity and a disability rating that exempts the fee. The insurance test is met, the fee is gone, and 100% leverage gives room. Here, VA cash-out often beats the alternatives.
When Staying Conventional Is the Better Fit
Staying conventional is the better fit more often than the marketing suggests.
Your current loan is already doing its job. Refinancing replaces the whole loan. You reset the term and take a new balance. If your existing terms are better than what a new loan would offer, the refinance may not pass the net tangible benefit test at all.
You need little or no cash. A cash-out refinance borrows more than you owed. The payment can rise even if other terms improve. If the goal is small, a separate home equity product may leave your first mortgage alone.
Your mortgage insurance is about to end. The CFPB explains that you can ask your servicer to cancel private mortgage insurance when the balance is scheduled to reach 80% of the home’s original value. The servicer must end it automatically at 78%, if you are current. A cancellation request must be in writing. You need a good payment history, no junior liens and evidence the value has not fallen. If you are close to those thresholds, waiting can beat refinancing.
You want to save your VA benefit. Using the benefit now changes whether a later VA loan counts as first use or subsequent use. The funding fee differs between the two. A borrower who expects to buy another home with VA should weigh that. It is a real consideration, not a reason to avoid VA, but it belongs in the decision.
You are not occupying the home. VA cash-out requires that you live in the property. Conventional cash-out can also cover second homes and investment properties, at lower leverage caps. Occupancy decides the leverage, and for a home you do not live in, VA is not the tool.
You will not hold the loan long. The funding fee and closing costs have to be earned back. A short horizon makes that harder.
A second scenario: picture a homeowner with a strong conventional loan, no mortgage insurance, and a small cash need. The net tangible benefit is thin, the new balance is larger, and entitlement gets spent. Staying put, or using a small equity product, likely makes more sense.
What Is Different About Costs and Closing?
The VA funding fee is not mortgage insurance. VA says the fee is a one-time payment that offsets the lack of a down payment and of monthly insurance. It is separate from the lender’s closing costs. “No monthly mortgage insurance” does not mean “no closing costs.”
You can see the line items on your Loan Estimate. The CFPB’s Loan Estimate explainer is a neutral place to compare offers side by side. Check the funding fee, the lender costs and the estimated cash to close separately.
If the fee is financed, it enlarges the loan balance. That is how VA cash-out reaches 100% of value including the fee.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
What Does the Process Look Like?
The steps run in a set order:
1. Establish eligibility. A first-time user requests a Certificate of Eligibility. Lenders can often pull it electronically.
2. Underwriting. The lender reviews credit, income, assets and residual income. VA treats debt-to-income and residual income as guidelines, not automatic pass or fail triggers.
3. Net tangible benefit and disclosures. The lender provides the test and the loan comparison before closing.
4. Appraisal. A VA appraiser sets the reasonable value. The loan-to-value test runs off that figure.
5. Fees and closing. The funding fee and lender costs are shown separately.
What decides the outcome comes down to four things: the appraised value, the lender’s own cap, your residual income and credit, and whether the benefit test is passed.
Type I and Type II: A Distinction That Matters
VA divides cash-out loans into two types. Type I means the new loan does not exceed the payoff, so no equity comes out. It requires the net tangible benefit. When a Type I loan refinances an existing VA-guaranteed loan, it also faces a recoupment test, which asks whether fees are earned back within 36 months through a lower monthly principal and interest payment. Type II means the loan, including the fee, exceeds the payoff, so you are pulling equity out. For Type II, recoupment is treated as met when the other requirements are satisfied.
For a first-time user paying off a conventional loan, the recoupment test tied to existing VA loans generally does not come into play. The net tangible benefit test still does.
Misconceptions Worth Clearing Up
- “I must take cash out.” No. The cash-out product is the entry route, but taking cash is optional.
- “VA always beats conventional.” No. It depends on the file.
- “No minimum credit score means anyone qualifies.” No. Lenders still set standards.
- “PMI never goes away on conventional.” Federal rules give a right to cancel or auto-terminate under conditions.
- “VA is only for buying.” No. VA lists cash-out refinance as a loan type that can pay off a non-VA loan.
Key Terms Defined
Certificate of Eligibility (COE): The VA document that confirms you qualify to use the home loan benefit.
Net tangible benefit: A test showing the new loan is in your financial interest.
Residual income: The money left each month after major obligations, which VA treats as the controlling test.
Funding fee: A one-time VA charge that can be financed and is waived for exempt veterans.
Full entitlement: Your unused VA benefit, which carries no VA-imposed loan limit.
Seasoning: The waiting period before a loan can be refinanced.
A Balanced Verdict
Pick VA cash-out when monthly mortgage insurance is costing you, your equity is modest, your residual income is strong, or your funding fee is waived. Stay conventional when your current loan already works, your cash need is small, your insurance is about to fall off, or you want to protect first-use entitlement for later.
Neither path is wrong by default. VA gives higher leverage and no monthly insurance, while conventional keeps your benefit and your existing loan terms. Run both through the same Loan Estimate comparison before you decide.
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. You can reach the team at 828-256-2183 or request a scenario review.
Frequently Asked Questions
Can I refinance a conventional loan into a VA loan?
Yes. The VA cash-out refinance is the route for moving a non-VA loan into a VA-backed one. You need a Certificate of Eligibility, you must meet credit and income standards, and you must live in the home. Taking cash out is optional.
Does using my VA benefit on a refinance affect a later purchase?
It can, because whether a later VA loan counts as first use or subsequent use changes the funding fee. Exempt veterans pay no funding fee. Weigh your plans before spending the benefit.
Does VA allow 100% financing on a cash-out?
VA allows up to 100% of reasonable value, and the wholesale programs reach that including the financed fee. Some lenders set a lower cap. Your appraisal and lender decide the final amount.
Can I get rid of my mortgage insurance without refinancing?
Often, yes. You can ask your servicer in writing to cancel it once the balance is scheduled to reach 80% of original value, and it ends automatically at 78% if you are current. You need a clean payment history and no junior liens.
Is the funding fee the same as mortgage insurance?
No. The funding fee is a one-time charge that can be financed and is waived for exempt veterans. VA loans carry no monthly mortgage insurance. Closing costs are separate from the fee.
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.
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References
1. VA: Cash-out refinance loan
4. VA: Funding fee and closing costs
5. CFPB: Removing private mortgage insurance
6. CFPB: Loan Estimate explainer
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 vs Conventional for a Veteran Wanting the Most Cash · VA Cash-Out vs Conventional Cash-Out With a Disability Fee Exemption · VA Cash-Out vs Conventional for a Veteran Exempt From the Funding Fee
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.