The Quick Read: VA sorts every cash-out refinance into one of two types by comparing your new loan to the payoff of the old one. A Type I keeps the new loan at or below that payoff, so you get little or no cash. A Type II goes above the payoff, so you walk away with cash. Type I is built for a borrower trying to lower a payment or move a non-VA loan into VA. Type II is built for a borrower who needs the equity.
The honest answer on fit is simple. If your goal is a lower payment, you will usually land in Type I, and the recoupment test is the hurdle. If your goal is cash, you will land in Type II. The test is gone, but the cost is a bigger balance. Lendmire arranges the VA cash-out refinance program through wholesale lenders. This page shows how the two types differ and when each makes sense.
Key Takeaways
- Type I: the new loan, funding fee included, does not exceed the payoff of the loan being refinanced.
- Type II: the new loan, funding fee included, exceeds the payoff.
- Recoupment: the 36-month break-even test applies to a Type I that pays off an existing VA loan. A Type II is treated as having met it.
- Both types: need a net tangible benefit, full credit and income review, and a loan at or below 100% of appraised value.
- Seasoning: applies when the loan you are paying off is a VA loan.
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.
Side-by-Side
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or below payoff | Above payoff |
| Cash to you | Little or none | Yes, the difference |
| Leverage ceiling | Up to 100% of value | Up to 100% of value |
| Credit floor | 580 on wholesale programs | 580 on wholesale programs |
| Mortgage insurance | None | None |
| Funding fee | Same fee schedule | Same fee schedule |
| 36-month recoupment | Yes, if paying off a VA loan | Deemed met |
| Net tangible benefit | Required | Required |
| Seasoning | Applies to a VA payoff | Applies to a VA payoff |
| Occupancy | Primary residence | Primary residence |
| Documentation | Full credit and income | Full credit and income |
A few notes on the table. VA sets no minimum credit score of its own. The 580 figure is the decision-score floor across the wholesale programs Lendmire places VA files with, and individual lenders may set a higher one. Leverage is capped at 100% of the appraised value, with any financed funding fee counted inside that number. Lenders can set a lower ceiling than VA does. Occupancy decides the leverage: VA cash-out is built for the home you live in.
The funding fee on a cash-out is 2.15% for first use and 3.3% for later use. It is waived for veterans who receive disability compensation and the other exempt groups. You can finance it into the loan, but that matters more than you might expect. More on that below.
Residual income is the controlling underwriting test on both types. The 41% debt-to-income figure is a guideline, not a cap. A higher ratio needs residual income well above the table.
How VA Defines the Two Types
Type I and Type II exist because Congress told VA to write cash-out rules in 2018. VA Circular 26-19-05 sets out three refinance categories: the IRRRL (the streamlined rate-reduction loan), Type I cash-out, and Type II cash-out. The circular defines them by one comparison. A Type I loan amount, including the funding fee, does not exceed the payoff of the loan being refinanced. A Type II loan amount, including the fee, exceeds it.
Here is the part that trips people up. The label describes the loan structure, not your intent. A Type I is still “cash-out” in VA’s system even when no cash changes hands.
The boundary case
The funding fee counts toward the new loan amount. So financing the fee can push a file from Type I into Type II. Say you refinance an existing VA loan and want to roll the fee and closing costs into the balance. The new loan then sits above the old payoff, and the file classifies as Type II. Paying those items in cash keeps the file in Type I territory.
That is why the classification is worth settling before you choose a structure. A loan officer enters the old loan and the new loan’s initial disclosure into VA’s system, and the system sorts the file into Type I or Type II. The type then decides which tests apply.
Non-VA payoffs
A conventional, FHA or USDA loan paid off into VA with no extra borrowing is still a Type I. It skips the recoupment certification and the VA seasoning certification, because those are tied to a VA-to-VA refinance. It still needs a net tangible benefit, as every cash-out does. Some lenders add their own timing rules, so ask about that early.
How the 36-Month Recoupment Test Works
Recoupment is a break-even test. It asks whether the monthly savings from the new loan pay back your refinance costs within 36 months. Under 38 CFR 36.4306, the lender certifies the result for a Type I that pays off a VA loan. The savings must come from lower regular monthly payments.
The math has three steps:
1. Add up the fees, closing costs and expenses of the refinance.
2. Subtract the new principal-and-interest payment from the old one to find the monthly reduction.
3. Divide the total costs by the monthly reduction. The answer is in months and must not exceed 36.
Taxes, escrow, insurance and similar items are left out. The regulation also excludes the funding fee. Circular 26-18-30 explains the same method. Only the payment on the loan itself counts, not the escrow portion.
Two modeled examples
These are modeled assumptions, not market data.
- Passing case: costs equal 24 months of the monthly savings. That is under 36, so the test is met.
- Failing case: costs equal 40 months of the monthly savings. That is over 36, so the Type I VA-to-VA file does not work as structured.
When a file fails, a lender can review options. The costs can shrink. The structure can change. Or you can keep the loan you have. Whether any fix works depends on lender guidelines and full file review.
Why Type II skips it
On a Type II, the balance and payment usually go up because you borrow more than you owe. A break-even test on savings makes no sense when there are no savings to measure. So the regulation treats the borrower as having recouped costs if the basic requirements of paragraph (a) are met. The Federal Register notice that introduced the rule says the same.
Skipping recoupment is not the same as skipping every test. A Type II still needs a net tangible benefit, the 100% value ceiling and, on a VA payoff, seasoning.
Which tests apply where
| Case | Recoupment | Seasoning | Benefit test |
|---|---|---|---|
| Type I, VA payoff | Yes | Yes | Yes |
| Type I, non-VA payoff | No | No | Yes |
| Type II, VA payoff | Deemed met | Yes | Yes |
| Type II, non-VA payoff | Deemed met | No | Yes |
Seasoning and the benefit test
Seasoning is the waiting period before you can refinance a VA loan. VA’s cash-out quick reference says the closing dates of the old and new loans cannot be fewer than 210 days apart, or the guaranty will not issue. Across the wholesale programs Lendmire works with, the working rule is the later of 210 days from your first payment and your sixth payment. A seasoning miss cannot be cured, so check your dates before you apply.
The net tangible benefit is the other universal test. The new loan must meet at least one benefit on VA’s list in the regulation. One example is dropping monthly mortgage insurance. The full list is in the eCFR text, so read it there instead of relying on a summary.
When Type I Is the Better Fit
Type I is the better fit when your goal is a lower payment or a cleaner loan, not cash. Three borrower pictures stand out.
- The non-VA homeowner moving into VA. You hold a conventional or FHA loan and want VA’s no-mortgage-insurance structure. A Type I from a non-VA payoff carries no recoupment test, which makes it the simpler path.
- The VA borrower with a real payment reduction. If the savings repay your costs inside 36 months, Type I does the job. The test keeps you from refinancing for a gain that never arrives.
- The borrower who wants to avoid a bigger balance. You stay at or under your payoff and keep your equity.
The tradeoff is discipline. You must pay costs outside the loan, or the file tips into Type II. On a VA-to-VA file, you also need the savings to clear the 36-month hurdle.
When Type II Is the Better Fit
Type II is the better fit when you need the cash. Common uses are paying off higher-cost debt, funding home improvements or covering a large expense. The equity comes out of the home you live in.
A Type II reaches up to 100% of the appraised value, with the financed funding fee counted inside it. That is more leverage than many other loan types allow on a cash-out. The loan also has no mortgage insurance. Together, those make it the program of choice for many veterans who want to tap equity.
Type II also avoids the 36-month test. That helps the borrower whose payment will rise, since a savings-based test would not fit the file. Lendmire’s piece Type I and Type II VA Cash-Out Rules With an Existing VA Loan walks through that situation.
The costs are real, though. Your balance goes up by the cash you take. Your monthly payment generally rises. The funding fee is 2.15% for first use and 3.3% after, and it is waived only for exempt groups. Residual income has to hold up at the larger payment, because that test controls approval. VA’s ceiling is 100%, but individual lenders often set a lower one.
Key Terms Defined
Type I cash-out: a VA refinance where the new loan, fee included, is at or below the old payoff.
Type II cash-out: a VA refinance where the new loan, fee included, is above the old payoff.
Recoupment: the break-even period, in months, for repaying refinance costs through lower monthly payments.
Seasoning: the waiting period VA requires before you can refinance an existing VA loan.
Net tangible benefit: a measurable gain, from VA’s list, that the new loan must deliver.
Funding fee: the one-time VA charge on the loan, which can be financed and is waived for exempt groups.
IRRRL: VA’s streamlined refinance for lowering the rate or moving from adjustable to fixed. It has its own rules, and its recoupment standard is still going through separate rulemaking. Do not mix IRRRL math into this comparison.
Common Mix-Ups
- “Cash-out means I get cash.” Not on a Type I. The label is about structure.
- “Type II has no tests.” It skips the 36-month test only.
- “Recoupment applies to every refinance.” The cash-out test applies to a Type I paying off a VA loan.
- “VA cash-out stops at 90% or 80% of value.” VA’s ceiling is 100%. Some lenders set lower limits.
- “Recoupment counts the funding fee and escrow.” The regulation excludes both.
- “A no-cost refinance costs nothing.” When a refinance is marketed that way, the costs are usually built into the balance or the rate. Compare the full terms on the Loan Estimate.
Construction-to-permanent loans are treated as cash-outs even when the principal does not change. That is an edge case, and a loan officer should flag it early.
The Verdict
Neither type is better on its face. Type I is the stricter test with the smaller outcome: a lower payment or a switch into VA. Type II is the looser test with the bigger consequence: more debt in exchange for cash.
The deciding question is what you want the loan to do. If the answer is a lower payment, run the 36-month math on a VA payoff and see whether the savings clear it. If the answer is cash, expect a Type II, then check that your residual income supports the larger payment.
Keep the loan you have if neither goal holds. Everything above is subject to lender guidelines, full file review and your certificate of eligibility, and nothing here is a commitment to lend. If you are weighing a cash-out refinance on the home you live in against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches.
Frequently Asked Questions
What is the difference between a Type I and a Type II VA cash-out?
The payoff comparison. A Type I loan, funding fee included, is at or below the payoff of the loan you are refinancing. A Type II is above it. That gap is the cash you receive.
Does a Type II VA cash-out require recoupment?
No separate 36-month test applies. The regulation deems the borrower to have recouped costs when the paragraph (a) requirements are met. A Type II still needs a net tangible benefit and the 100% value limit, and it needs seasoning when you are paying off a VA loan.
Does recoupment apply when I refinance a non-VA loan into VA?
No. The recoupment certification applies to a Type I that pays off a VA loan. A non-VA payoff into a Type I needs the net tangible benefit and the disclosures, and some lenders add their own timing rules.
How is recoupment calculated, and what is excluded?
Divide total fees, closing costs and expenses by the reduction in your monthly principal-and-interest payment. The result must not exceed 36 months. Taxes, escrow, insurance and the funding fee are left out.
Can I finance the funding fee?
Yes, within limits. The financed fee cannot push the loan above 100% of the appraised value. Any part above that must be paid in cash at closing. Because the fee counts toward the loan amount, financing it can also move a Type I into Type II.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
4. VA Loan Guaranty cash-out quick reference
5. Federal Register: IRRRL supplemental proposal
This article is part of Lendmire’s VA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: VA Cash-Out Recordation Rules for a Montgomery County Home · VA Cash-Out Refinance Solar Lien Rules for a First-Time Equity Borrower · 5 Myths About Qualifying for a VA Cash-Out Refinance
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.