The Quick Read: A VA cash-out refinance can pay off a second lien held by a person or private lender, because it refinances liens of any type into one new first-lien VA loan. The new loan must be a first mortgage, and the payoffs, funding fee and costs all have to fit under the appraised value. The lender also has to document a net tangible benefit, which means the new loan must leave you better off in a way VA recognizes. Everything here depends on lender guidelines and a full file review. Nothing in it is a commitment to lend.
VA cash-out estimate
Seeded with an example value, a typical balance, and a round cash request at the first-use fee; change any field.
Editable benchmark: 7.40% as of October 15, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a VA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the full-value VA cap with the first-use funding fee financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a VA cash-out refinance quote; a VA loan is priced by the lender at lock. The total loan, funding fee included, is capped at the program leverage on the reasonable value; the fee follows the tier chosen. The cash available is what the cap allows less the balances paid off and the fee, before closing costs, which are not included. The HELOC line is the line program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. The debt-to-income figure is a guideline; residual income decides a VA file. Licensed in sixteen states for consumer mortgages.
What Is a Private Second, and Why Does It Matter?
A private second is a loan secured by your home, behind your first mortgage, and held by someone other than a bank. Think of a family member who lent you money, a seller who carried part of the price, or a private lender who funded a short-term note.
It matters because a VA cash-out must sit in first position. A second lien that stays in place has to be paid off, or its holder has to agree to step behind the new loan. Many private holders never agreed to anything of the sort when they made the loan. Paying the note off through the refinance is often the cleaner route.
VA describes this product as a way to refinance an existing first mortgage on a home you own and occupy, with proceeds that can pay off other debts. A second lien is one of those debts.
How the Refinance Retires the Second, Step by Step
This is not a streamline. It is underwritten much like a purchase, and the sequence below is how these files usually run.
1. Eligibility. You need a certificate of eligibility (COE) from VA, and the home must be your primary residence. Investment properties and second homes do not qualify for this program. Occupancy decides the leverage.
2. Full underwriting. The lender reviews credit, income and debts. Across the wholesale programs Lendmire places VA files with, residual income is the controlling test. Residual income is what is left of your monthly income after taxes, housing and debts. The 41% debt-to-income figure is a guideline, not a cap. A higher ratio needs residual income well above the table.
3. VA appraisal. A VA-approved appraiser sets the reasonable value. That value is the ceiling for everything that follows.
4. Payoff sizing. The new loan must cover the first-lien payoff, the second-lien payoff, the funding fee and allowable costs. The program reaches 100% of the appraised value, including the financed fee. Whatever is left over comes to you as cash.
5. Net tangible benefit. The lender must show the refinance is in your financial interest. More on this below.
6. Disclosures and closing. You receive a Loan Estimate after you apply and a Closing Disclosure before you sign. Each payoff appears on the closing paperwork.
7. Release. After closing, the title company pays off the second and the lien holder records a release.
How Do You Size the Payoff?
Picture a home that appraises at a given value. Your first mortgage is at a moderate share of that value. A private second sits behind it. Add those two payoffs, the funding fee and the costs. If the sum stays within 100% of the appraised value, the second can be retired, and any remainder is your cash out.
If the sum runs over, you have three choices. Bring cash to closing. Negotiate the second’s payoff. Or pick a different path. A short appraisal is one of the most common reasons a plan like this stalls.
Be careful with the payoff figure on the second. A private holder’s payoff can include accrued interest, a minimum interest charge or an exit fee written into the note. Those add to the total, and they come out of your proceeds.
The funding fee is part of the math. Across the wholesale programs we place files with, the VA cash-out funding fee is 2.15% on first use and 3.3% after that. It can be financed. It is waived for veterans receiving compensation for a service-connected disability and for the other exempt groups. It is a one-time fee, not monthly mortgage insurance, and the VA loan carries no mortgage insurance at all. An exempt borrower keeps more cash after the payoff.
Does Retiring a Second Pass the Net Tangible Benefit Test?
Not automatically. Eliminating a second lien is not listed as a standalone benefit. 38 CFR § 36.4306 requires the lender to give you a net tangible benefit test, and the test has to be satisfied.
VA’s rules list several qualifying benefits. They include a shorter term, removing monthly mortgage insurance, and a new loan at or under 90% of reasonable value. In its interim final rule, VA treats that 10% equity cushion as one criterion among several.
In practice, a private second often carries a high cost or a short balloon. Folding it into a longer-term first can lower the combined monthly obligation. The lender compares the new payment against the old first payment plus the second’s payment. That comparison is where many of these files earn their benefit. A very high loan-to-value ratio is where they struggle, because the 90% route is then off the table.
The same rule includes a recoupment test in some cases, where fees and costs must be recovered through lower regular payments within 36 months. How a combined first-plus-second payoff is classified for those extra tests is a question the lender should answer from VA’s current handbook before you commit.
Pay Off, Subordinate or Leave It?
You have three possible paths. Only one is usually practical with a private holder.
| Path | What happens to the second | Who must cooperate | Main risk |
|---|---|---|---|
| Pay it off | Retired at closing, then released | Holder gives a payoff statement | Payoff higher than expected |
| Subordinate | Stays, behind the new first | Holder must agree in writing | Holder refuses or stalls |
| Leave it | Not allowed if it sits ahead of the new loan | Not applicable | New loan cannot be a first lien |
Subordination is a decision by the lender and the holder together. A private individual may have little reason to agree, and the lender may not want the added lien. That is why payoff is the common route.
One related point trips people up. The VA interest rate reduction refinance loan (IRRRL) is the streamline product for existing VA loans. It cannot pay off a second lien. If retiring the second is the goal, the cash-out is the tool. For a broader look at when a cash-out beats leaving a second lien in place, see Lendmire’s piece VA Cash-Out Refinance Criteria for Choosing Over a Second Lien.
Working With a Private Lien Holder
A bank has a payoff department. A private holder has a phone and a stack of paperwork. Plan for that.
- Request a written payoff statement early. Ask for the principal balance, accrued interest, any fees and the per-diem amount, which is the daily interest if closing slips.
- Gather the paper. Collect the note, the recorded deed of trust or mortgage and your payment history. The title company will search for the recorded lien, and the lender needs to see it.
- Check the exit terms. Some private notes carry prepayment penalties or fixed minimum interest. Read yours before you count on a payoff number.
- Watch for an unrecorded note. A handshake loan is a different problem. If nothing was recorded, the title company and the lender have to decide how to treat it, and that conversation should happen before the appraisal.
- Confirm the release. After closing, the holder records a satisfaction or release of the lien. Ask the title company to confirm it was recorded. Do not assume.
Lendmire’s article How to Retire a Private Note With a Cash-Out Refinance covers the same payoff mechanics on other loan types.
What Can Go Wrong?
Honestly, most failures trace to a handful of causes.
- The holder will not give a payoff. Without a figure, the title company cannot close.
- The lien is disputed. A disagreement over the balance has to be settled first.
- The appraisal comes in short. The payoffs, fee and costs no longer fit under 100% of value.
- The title search finds another lien. A tax or judgment lien may sit ahead of the second. VA permits refinancing liens of any type, current or delinquent, but each one must be paid.
- The benefit test fails. The new payment does not drop, and the loan-to-value is above the 90% route.
- The lender will not do everything VA allows. VA sets the outer limits. Lenders can set stricter ones. Some set a higher credit floor, and some cap leverage below 100%.
Key Terms Defined
Private second: A loan secured by your home, behind the first mortgage, held by an individual or a non-bank lender.
Net tangible benefit: A test showing the new loan is in your financial interest, such as a lower payment or a shorter term.
Funding fee: A one-time VA fee that can be financed into the loan and is waived for exempt borrowers. It is not mortgage insurance.
Residual income: The money left each month after taxes, housing costs and debts.
Subordination: A lien holder’s written agreement to rank behind a newer loan.
COE: The certificate of eligibility that VA issues to confirm your entitlement.
What Does Your Decision Look Like in Practice?
Start with three questions. How much is owed on the second, including interest and any exit fee? What does the home appraise for? And does the combined payment drop or the loan-to-value land at or under 90%?
If those answers line up, a VA cash-out can replace two payments with one. If they do not, the file may need cash at closing, a different structure or a conversation about leaving the second alone. The 580 decision-score floor across Lendmire’s wholesale VA programs is a lender-level starting point. VA itself sets no minimum, and every figure here is subject to lender guidelines and full file review.
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. Read more on the VA cash-out refinance program page, or call 828-256-2183.
Frequently Asked Questions
Can a VA cash-out pay off a family-held or seller-carried second?
Yes, when the lien is real and can be documented. The lender and title company need the note and the recorded lien, plus a written payoff statement from the holder. An unrecorded loan between family members needs extra review before it can be treated as a lien.
Do I have to take cash out?
No. The loan can simply pay off the first and the second, even if little or nothing is left over for you. It is still a cash-out refinance for rules purposes, so the appraisal, underwriting and net tangible benefit test all apply.
What if the holder will not subordinate?
Then the second has to be paid off through the refinance, because the new VA loan must be a first lien. That is why many private seconds are retired rather than left in place.
Does a paid-off home qualify?
Generally no. The program refinances an existing lien, so a home with no loan against it is a poor fit. Other options may exist, and a loan officer can walk through them.
How do I confirm the lien was released?
Ask the title company for proof that the release or satisfaction was recorded after closing. Keep a copy with your closing papers.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. VA Home Loans – Purchase & Cash-Out Refinance
2. 38 CFR § 36.4306 (CFR 2025 ed.)
3. Federal Register – Cash-Out Refinance interim final rule
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 Asset Income Verification for a Retiree · How to Buy Out Heirs Who Will Not Sell With a VA Cash-Out · How to Get a VA Cash-Out Refinance on a Paid-Off Home
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.