The Quick Read: No, financing closing costs does not by itself make a refinance a Type II cash-out, and it does not mean you receive cash. The label depends on one comparison: the new loan amount, including the VA funding fee, against the payoff of the loan being replaced. If the new loan stays at or below that payoff, it is Type I. If it goes above, it is Type II.
What Does “Cash-Out” Actually Mean at the VA?
“Cash-out” at the VA describes a loan structure, not what lands in your bank account. The VA’s cash-out product covers two situations: taking cash from your equity, and refinancing a non-VA loan into a VA-backed loan. VA.gov describes it exactly that way. A homeowner with a conventional or FHA loan who wants into a VA loan and takes no cash still uses the cash-out product.
That’s the source of most of the confusion. People hear “cash-out” and assume money changes hands. Often it doesn’t.
The VA sorts refinances into three buckets: the VA streamline refinance (the streamline), Type I cash-out, and Type II cash-out. VA Circular 26-19-05 lays out that three-category structure. Everything below hangs on which bucket your file lands in.
How Type I and Type II Are Defined
The test is a single comparison, and the funding fee is part of it.
- Type I: the new loan amount, including the funding fee, does not exceed the payoff of the loan being refinanced.
- Type II: the new loan amount, including the funding fee, exceeds that payoff.
Those definitions come from VA Circular 26-18-30. The practical reading follows directly. Say you finance your closing costs and the funding fee, and the total still sits at or under the old payoff. That is a Type I. Finance enough that the total climbs above the payoff? That is a Type II, because the loan now exceeds what you owe.
Here’s the catch. The funding fee counts in that test. A financed funding fee alone can tip a loan from Type I to Type II when the file is already sitting right at the payoff line.
One caution on precision. The VA’s published definitions don’t spell out which payoff components count, such as accrued interest or escrow balances. Any lender who states that detail as settled fact is going beyond the text. The final payoff figure and how it’s tested come out of full file review.
So Does Financing Closing Costs Make It Cash-Out?
Financing costs only matters if it pushes the loan past the payoff. That’s the whole answer, and it helps to see it in three simple situations.
1. Costs financed, loan still at or under payoff. Type I. This can happen when costs are modest compared with the old balance, or when some costs are paid outside the loan.
2. Costs financed, loan lands above payoff. Type II. The extra amount functions like equity you’re borrowing against, even if you never see a check.
3. Costs paid from cash you take out. This is a Type II structure by definition, since the new loan exceeds the payoff by the amount of cash.
Some lender pages treat the loan amount test as “payoff plus allowable closing costs.” That framing differs from the VA’s own circular wording, which tests the loan amount including the funding fee against the payoff. Across the wholesale programs Lendmire places VA files with, the working approach is the circular’s: build the new loan amount, include the fee, and compare it to payoff. Final classification stays subject to lender guidelines and full file review.
Why the Type Matters: What Changes With Type I
Type I files can carry extra tests that Type II files don’t, and heavy closing costs can make those tests harder to pass.
For a VA-to-VA Type I refinance, the rules in 38 CFR 36.4306 include rate-reduction tests. For a fixed-to-fixed refinance, the new rate must be at least 50 basis points below the old one. A fixed-to-adjustable move needs a larger drop, at least 200 basis points. These tests explain why a Type I VA-to-VA file is a different animal from a simple cash-out. They are mechanics, not a promise of any particular outcome.
Then there’s recoupment. On a Type I refinance of an existing VA loan, the lender must certify that fees, expenses, and closing costs are recouped within 36 months of closing. Per VA Circular 26-19-05, costs both financed and paid outside closing count toward that test. Financing a cost does not hide it. A large fee stack can fail the 36-month limit whether you paid it in cash or rolled it into the balance.
Two points about scope. These rate-drop and recoupment tests are written for VA-to-VA refinances. A non-VA loan refinanced into a VA loan is cash-out by product name and can be Type I in structure when the new loan stays at or below the payoff, but the VA-to-VA tests were not drafted for it. Lender practice and program overlays still shape how those files are reviewed.
The Rules That Apply Either Way
Some requirements apply regardless of type. Across the programs Lendmire works with:
- Leverage: the VA cash-out reaches 100% of the appraised value, including the financed funding fee. The regulation sets 100% of reasonable value as the ceiling, and individual lenders can set lower caps through overlays.
- Net tangible benefit: the refinance must benefit you in a measurable way. The regulation lists benefits such as a lower rate, lower payment, shorter term, higher residual income, or moving from an adjustable rate to a fixed rate.
- Seasoning: the later of 210 days from the first payment and the sixth payment.
- Occupancy: you must live in the home you’re refinancing.
- Eligibility: a valid Certificate of Eligibility decides it. Service requirements are the VA’s rules, not the lender’s.
- Credit and income: the wholesale programs start at a 580 decision score. Residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap, though a higher ratio needs residual income well above the standard table.
All of this is subject to lender guidelines and a full file review, and none of it is a commitment to lend.
What Can Be Financed, and What Can’t?
On a cash-out refinance, closing costs can generally be included in the new loan, within the 100% value limit and the tests above. That’s different from a VA purchase, where the funding fee is usually the one cost that can be financed and the other costs get paid some other way. Mixing up those two situations is where the blanket “you can’t roll closing costs into a VA loan” claim comes from. It treats a purchase rule as a universal rule.
Some lender pages also say cash-out costs can’t be rolled in the way a streamline allows and must come out of equity proceeds. That is lender practice, not a VA rule. The regulation limits financing through the 100% cap and the test thresholds. Whether a particular lender will fund a particular structure is a file-level question.
Paying to buy down the cost of a loan deserves its own mention. The regulation restricts financing those charges: they are not added to the principal unless the loan stays at or below 100% of value after fees and expenses. It also says a lower rate cannot come solely from that kind of upfront charge unless it is paid at closing. If a loan estimate shows these charges, ask how they interact with the cap.
The Funding Fee in the Mix
The funding fee is reviewable and is the piece most likely to nudge a loan over the payoff line.
For a VA cash-out refinance the fee is 2.15% for first use and 3.3% for subsequent use. The IRRRL fee is 0.5%. Veterans receiving compensation for a service-connected disability, and the other exempt groups, are not charged the fee. For an exempt borrower the fee drops out of the Type I test entirely, which can keep a borderline file under the payoff line.
These are program parameters, not prices, and they apply subject to lender guidelines.
A Borrower Scenario in Plain Terms
Picture a veteran with a conventional loan who wants to move into a VA loan and take no cash. The home’s value comfortably supports a loan equal to the payoff. The veteran asks the lender to roll the funding fee and most closing costs into the new loan.
If the new loan amount stays at or below the payoff as defined for the file, the structure is Type I. If the financed fee and financed costs push the new loan amount over that payoff, the structure is Type II, even though the veteran took no cash. In that case the file is reviewed under the Type II test set, and the veteran should expect a conversation about whether paying some costs separately keeps the loan Type I.
A second veteran has an existing VA loan and wants a lower rate. Here the first question is whether the IRRRL does the job. It refinances a VA loan to a lower rate or from adjustable to fixed with no VA appraisal. When the veteran also wants cash, or when the structure needs a full refinance, the cash-out product is the path, and the Type I and II definitions govern.
What Financing the Costs Does to Your Budget
Financing costs raises the loan balance, and a higher balance means a higher principal-and-interest payment and more interest over the life of the loan. In exchange you bring less cash to closing. That’s the whole trade.
The CFPB’s Loan Estimate separates the two. It shows “Closing Costs Financed (Paid from your Loan Amount)” as its own line, apart from Estimated Cash to Close. The CFPB’s Your Home Loan Toolkit also explains that charges for services you can shop for can rise at closing, but generally by no more than 10% of the final Loan Estimate figure. Reading both lines side by side is the fastest way to see what financing actually does on your file.
The VA itself warns that refinance closing costs can add up to thousands of dollars and advises borrowers to understand how the new loan amount compares to the home’s value.
Who comes out ahead by financing? A borrower who values keeping cash on hand and plans to stay long enough for the recoupment math to work. Who might prefer paying costs separately? A borrower close to the payoff line, one whose fee stack is heavy, or one who plans to sell or refinance again soon. This one is a real judgment call, and the answer changes with how long you’ll hold the loan.
For a closer look at the cash effect, Lendmire’s piece How Rolling Closing Costs Into a Cash-Out Refinance Changes Your Cash walks through the general mechanics.
Where VA Cash-Out Files Go Sideways
A few patterns show up again and again across the wholesale programs.
- Assuming “cash-out” means cash. A non-VA-to-VA refinance with no cash taken is still the cash-out product.
- Ignoring the funding fee in the payoff test. The fee counts, so a financed fee can flip the classification.
- Treating recoupment as a financed-versus-paid issue. Both count toward the 36-month test on a Type I VA-to-VA file.
- Forgetting the value cap. Financed costs and fees have to fit under 100% of the appraised value. When they don’t, something has to be paid in cash or dropped.
- Comparing a purchase rule to a refinance. The two follow different logic, which is why the answers sound contradictory online.
If you’re deciding how much to finance, how much a VA cash-out nets after the funding fee and closing costs covers the takeaway side of the equation.
Key Terms Defined
Type I cash-out: a refinance where the new loan amount, including the funding fee, does not exceed the payoff of the loan being refinanced.
Type II cash-out: a refinance where the new loan amount, including the funding fee, exceeds the payoff.
IRRRL: the Interest Rate Reduction Refinance Loan, a streamline that refinances an existing VA loan to a lower rate or from adjustable to fixed.
Recoupment: the test showing that fees and closing costs, financed or paid outside closing, are earned back within 36 months on a Type I VA-to-VA refinance.
Net tangible benefit: a measurable gain from the refinance, such as a lower payment, a shorter term, or a move from an adjustable to a fixed rate.
Certificate of Eligibility (COE): the VA document that confirms your entitlement.
Frequently Asked Questions
If I take no cash, is my VA refinance still called cash-out?
Yes, when the loan being paid off is not a VA loan, or when the file needs the full refinance product rather than the IRRRL. The VA uses “cash-out” for the product, not for what you receive. With no cash taken and the new loan at or below the payoff, the structure is Type I.
Can the funding fee push me from Type I to Type II?
Yes. The funding fee counts toward the new loan amount when it’s tested against the payoff. If the fee is financed and the total then exceeds the payoff, the loan becomes Type II. Exempt veterans don’t carry the fee, which can keep a borderline file under the line.
Do financed closing costs count toward the 36-month recoupment test?
Yes. On a Type I refinance of an existing VA loan, costs both financed and paid outside closing count. Rolling a cost into the balance doesn’t take it out of the test.
Can I roll closing costs into any VA loan?
It depends on the loan type. On a purchase, the funding fee is generally the reviewable item, and other costs get covered another way. On a refinance, costs can generally be included within the 100% value limit and the program tests. Lender practices vary, so confirm how a specific file would be structured.
Is an IRRRL a Type I cash-out?
No. The IRRRL is its own category, meant to refinance an existing VA loan at a lower rate or move it from adjustable to fixed, with no VA appraisal. Type I and Type II belong to the cash-out product.
For the program’s current guidelines, see the VA cash-out refinance program.
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.gov: Cash-out refinance loan
5. CFPB Your Home Loan Toolkit
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: Texas VA Cash-Out Limits for a Veteran With an Existing VA Loan · VA Cash-Out Net Tangible Benefit Rules With an Existing VA Loan · VA Cash-Out Rules for a Texas Homestead Paying Off a Non-VA Loan
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.