The Quick Read: On a VA cash-out refinance, the total new loan cannot go above 100% of the home’s reasonable value, and the funding fee counts toward that total when you finance it. The VA appraisal sets reasonable value. Every dollar of financed fee therefore reduces the cash you can take out. If the fee would push the loan past 100%, you pay the excess in cash at closing. Whether you pay a fee at all depends on your VA benefit history and exemption status, and all of it is subject to lender guidelines and full file review.
Key Takeaways
- The ceiling is 100% of VA’s appraised reasonable value. It is not 100% of a Zestimate, a tax bill, or what a neighbor sold for.
- The funding fee sits inside that ceiling. It is not added on top.
- The cash-out fee is 2.15% on first use and 3.3% on later use. It is waived for exempt veterans.
- Your usable cash equals the ceiling minus your payoff, closing costs, and the fee.
- Exempt borrowers keep the fee out of the loan, so more of the ceiling is theirs to use.
What Is “Reasonable Value,” and Who Sets It?
Reasonable value is the number a qualified, neutral appraiser would call a fair price for the home given current market conditions. VA reviews the appraisal and issues it as the Notice of Value. That notice, not your opinion of the house, drives the whole loan.
A few things do not set reasonable value:
- An online home-value estimate.
- Your county tax assessment.
- What you paid for the home, or what you hope it is worth.
- What a lender’s sales team says it “should” appraise for.
This matters because the VA cash-out reaches 100% of the appraised value, including the financed fee. A low appraisal does not just shrink your equity. It shrinks the ceiling itself.
Across the wholesale programs I place VA files with, the appraisal is where most cash-out plans bend. Borrowers plan around the value they believe in. The file gets built around the value the appraiser supports.
How Does the Funding Fee Work on a Cash-Out?
The funding fee is a one-time charge paid to VA, not a fee the lender keeps. On a cash-out refinance it is 2.15% of the loan for first-time VA use and 3.3% for later use. A streamlined VA refinance (the IRRRL) carries a 0.5% fee. VA’s own funding fee page lays out who pays and who is exempt.
Two points trip people up.
A down payment does not change the refinance fee. On a purchase, putting more down lowers the fee tier. On a cash-out, the tier depends on whether you have used your VA benefit before. Your equity does not move it.
The fee is a percentage of the loan, and financing it enlarges the loan. Roll the fee in and the loan gets bigger, which makes the fee itself slightly bigger. That loop is why the math below is a little circular.
Veterans who receive VA compensation for a service-connected disability are exempt. So are surviving spouses receiving DIC and active-duty Purple Heart recipients. If your disability claim is still pending, the lender may have to collect the fee at closing. A refund can follow if your rating is granted. Confirm your status on the VA page above before you build a plan around it.
Where the Fee Meets the Cap
The cap is one box, and everything goes inside it. The federal rule says the new loan cannot exceed 100 percent of reasonable value, and any part of a financed fee that would break that limit must be paid in cash. You can read the language in 38 CFR 36.4306.
The VA Lenders Handbook says the same thing in lender terms. In Chapter 3 of the VA Lenders Handbook, the cash-out loan amount, including the funding fee, may not exceed 100% of VA’s reasonable value.
Inside the box go four things:
1. The payoff of your current mortgage.
2. Your closing costs that are rolled in.
3. Any cash you want to receive.
4. The financed funding fee.
Divide that total by reasonable value. If the answer is 100% or less, the loan fits.
The “plus the fee” idea is outdated
Older guidance allowed a loan of 100% plus the fee. That is no longer how it works. The 2018 rulemaking in the Federal Register replaced the older, lower ceiling Congress set in 1989 with the 100% figure, and it put the fee inside the cap. If a website tells you the fee goes on top, check how old that page is.
What about the “cap” people quote?
Many borrowers hear that VA caps cash-out well below the full value. That was the old federal limit. Today it survives only in narrow places, such as one of the net tangible benefit tests and some specific refinance situations. Separately, individual lenders often set lower limits of their own. Those are called overlays. Overlays are lender policy, not VA rules, and they vary from lender to lender.
A Worked Example
Picture a home that appraises at a given value. Call that value 100%. Say your payoff, rolled-in closing costs, and the cash you want add up to 96% of that value before the fee.
The fee is a percentage of the final loan, so the math loops. The final loan equals the pre-fee total divided by one minus the fee percentage. These figures are modeled assumptions, not market data.
| Borrower | Pre-fee total | Financed fee | Loan vs. value |
|---|---|---|---|
| First use (2.15%) | 96% | about 2.1% | about 98.1% |
| Later use (3.3%) | 96% | about 3.3% | about 99.3% |
| Exempt | 96% | none | 96% |
All three fit inside the 100% box. Notice the exempt borrower finishes with the smallest loan for the same cash in hand. The later-use borrower pays more for the identical outcome.
Now stress it. Say the same home appraises lower, or you want more cash, and the pre-fee total reaches 98% of value.
| Borrower | Pre-fee total | Loan vs. value | What happens |
|---|---|---|---|
| First use (2.15%) | 98% | about 100.15% | Small excess paid in cash |
| Later use (3.3%) | 98% | about 101.3% | Larger excess paid in cash |
| Exempt | 98% | 98% | Fits as planned |
In this stress case, the first-use borrower is barely over, and the later-use borrower is over by more. Either would pay the excess at closing, trim the cash taken out, or reduce rolled-in costs. The exempt borrower is untouched.
Is this a true quote for your file? No. A lender builds the real figures after your appraisal comes back. Use the example to see how the pieces push on each other, not to predict your number. For a closer look at the cash left after fees and costs, see Lendmire’s piece How Much a VA Cash-Out Nets After the Funding Fee and Closing Costs.
How the Loan Is Built, Step by Step
Here is how a VA cash-out file moves from start to finish. This is the VA cash-out refinance program in the order a lender works through it.
Step 1: Eligibility. VA’s Certificate of Eligibility (COE) decides whether you qualify for the benefit at all. The service requirements are VA’s rules. You must also live in the home, since this is an owner-occupied program and not a rental or second-home loan. VA’s cash-out refinance page confirms the occupancy requirement.
Step 2: Credit and income. VA sets no minimum credit score. The wholesale programs I place VA loans with start at a 580 decision score. Residual income is the controlling test. That is the money left each month after your major obligations, taxes, and living costs. The 41% debt-to-income figure is a guideline, not a hard cap. A higher ratio needs residual income well above the standard table.
Step 3: Appraisal. VA sets reasonable value through the appraisal and the Notice of Value. This sets the ceiling.
Step 4: Build the loan. The lender totals the payoff, costs, cash to you, and the financed fee, then tests the result against the ceiling.
Step 5: Seasoning and net tangible benefit. The cash-out carries the same seasoning as the streamlined refinance: the later of 210 days from your first payment and your sixth payment. It also needs a net tangible benefit. That means the new loan must clearly help you, such as moving from an adjustable to a fixed structure or lifting your residual income. The lender must give you a written comparison. It covers the new term against the remaining one, the total paid under each, the loan-to-value before and after, and the equity being removed.
Step 6: Term. The maximum term is the lesser of 30 years and 32 days or the home’s remaining economic life.
Two loan types to know
A Type I refinance does not exceed the payoff of the loan it replaces. A Type II is the true cash-out, where the new loan is larger than the payoff. The cap applies to both, but Type II is where fee and ceiling collide.
One more case: you can refinance a loan that is not VA-backed into VA. For fee purposes this counts as a cash-out even when no cash leaves the closing table. The cash-out fee tiers apply.
Federal Rule or Lender Overlay?
Borrowers often get one number from VA’s rule and a different one from a lender. Both can be correct. They answer different questions.
| Limit | Federal rule | Lender overlay |
|---|---|---|
| Ceiling | 100% of reasonable value | Often set lower |
| Fee inside cap | Yes | Follows the rule |
| Credit floor | VA sets none | Lender sets one |
| Seasoning | Later of 210 days or 6th payment | Lenders may add more |
On the programs I use, the cash-out reaches 100% of appraised value, including the financed fee, with a 580 decision-score floor. Some lenders elsewhere set a higher floor or a lower leverage cap. Ask which limits are VA’s and which are the lender’s before you plan around a number.
The Low-Appraisal Playbook
A low appraisal can reset the whole plan. You have a few options, and each has a tradeoff.
1. Ask for reconsideration of value. If you have better comparable sales than the appraiser used, your lender can submit them. There is no promise it changes the number.
2. Take less cash out. Cutting the cash line frees room under the ceiling for the fee.
3. Roll in fewer closing costs. Costs paid out of pocket do not compete for room in the cap.
4. Pay part of the fee in cash. This is exactly what the rule requires when the fee would overflow the cap.
5. Reconsider the plan. If the numbers no longer help you, keeping your current loan is a legitimate answer.
What This Means for Your Budget and Your Equity
Rolling the fee and closing costs into the balance raises the balance, and a bigger balance means a bigger monthly payment. VA warns that closing costs can run to thousands of dollars and tells borrowers to understand how the new loan relates to the home’s value. Treat that as practical advice.
You are also trading equity for cash. The lender must disclose how much home equity you are removing, and that can limit your options if you sell later. A cash-out makes sense when the money earns its keep, such as paying off higher-cost debt or funding a repair that protects the home. It makes less sense for spending you could not otherwise justify.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
If you already hold a VA loan, the fee tier works differently.
Edge Cases Worth Knowing
- The IRRRL plays by different rules. The streamlined VA refinance is a rate-or-structure refinance of an existing VA loan with no VA appraisal and a 0.5% fee unless exempt. The reasonable-value cap analysis above is about the cash-out.
- Exempt but pending. If your disability rating is still in process, expect the fee to be collected and possibly refunded later.
- Entitlement. With full entitlement, there is no VA loan limit, and the wholesale programs I place with serve amounts to $4,000,000. With remaining entitlement, a down payment may be needed. Speak with a loan officer about your situation.
- Fixed-to-adjustable refinances. When you swap a fixed loan for an adjustable one in a Type I refinance, a lower leverage test can apply.
- Purchase buyers. If you landed here from a purchase, the key idea is similar. VA wants the price supported by reasonable value, and the purchase fee tiers do respond to your down payment.
Key Terms Defined
Reasonable value: The appraiser’s opinion of a fair price for the home, issued by VA as the Notice of Value, and the base for the loan cap.
Funding fee: A one-time charge paid to VA that helps keep the program running; it can be financed and is waived for exempt borrowers.
Overlay: A rule a lender adds on top of VA’s own requirements, such as a lower leverage limit or a higher credit floor.
Net tangible benefit: A real, measurable gain from the refinance, such as a more stable loan structure or better monthly cash flow.
Residual income: The money left each month after your major obligations and living costs; it is the controlling VA underwriting test.
Seasoning: The waiting period between your first payment and the date you can refinance.
Frequently Asked Questions
Does the VA funding fee count toward the 100% limit?
Yes, when you finance it. The total loan, fee included, has to stay at or under 100% of reasonable value. Any piece of the fee that would push you over must be paid in cash at closing.
Why is my cash-out smaller than my equity suggests?
Equity is only the starting point. From the ceiling, the lender subtracts your payoff, rolled-in closing costs, and the financed fee. What remains is your cash. A lower appraisal or a later-use fee tier shrinks that number further.
Can a lender cap cash-out below what VA allows?
Yes. VA sets the outer limit, and lenders can set tighter ones through overlays. On the wholesale programs I use, the cash-out reaches 100% of appraised value including the fee, subject to lender guidelines and file review. Lenders may differ.
Do I have to pay the funding fee on a non-VA loan I refinance into VA?
Generally yes, unless you are exempt. A loan that is not VA-backed, refinanced into VA, counts as a cash-out for fee purposes, even if no cash comes out, so the cash-out tiers apply.
Does a down payment lower the fee on a cash-out?
No. A down payment changes the fee tier on a purchase. On a cash-out, the fee depends on whether this is your first use of the benefit or a later one.
Weighing Your Options
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. Lendmire is a mortgage broker that arranges these loans through wholesale lenders. Program figures are subject to lender guidelines and full file review, and none of this is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. 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 Funding Fee: Who Pays, Who Is Exempt, VA News
3. VA Lenders Handbook, Chapter 3, KnowVA
4. Federal Register, Loan Guaranty: Revisions to VA-Guaranteed or Insured Cash-Out Home Refinance Loans
5. VA Cash-Out Refinance Loan, VA.gov
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: Does the VA Full-Value Cap Beat Conventional Cash-Out on High Equity? · VA IRRRL vs VA Cash-Out Requirements for a Fee-Exempt Veteran · VA Cash-Out Refinance Requirements for Cap, Seasoning and Fees
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.