The Quick Read: A veteran who wants cash is in Type II, because Type II is the version where the new loan is larger than the loan being paid off. Type I is the version where the new loan, funding fee included, does not exceed the payoff, so no equity comes out. Type I mostly serves veterans who want to move a non-VA loan into VA, or change a VA loan’s terms, without taking cash.
Here is the honest answer on who each option is for. Type I is for the veteran who likes the idea of a VA loan but does not need cash. Think of someone with an FHA or conventional mortgage who wants to swap into VA. Type II is for the veteran who wants to turn equity into money, whether for debt payoff, repairs, or something else. If you want cash, the type question mostly answers itself. What matters more is whether taking the cash makes sense for your budget and your remaining equity.
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: 7.32% as of October 22, 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.
Many people assume “cash-out” always means cash in hand. In VA’s terms, it does not. The label covers both loans, and the dividing line is a simple comparison of the new loan amount to the payoff.
What Actually Decides Type I vs. Type II
VA’s Lenders Handbook, Chapter 6 explains that Congress set different cash-out requirements depending on the payoff amount of the loan being refinanced. VA responded by splitting cash-out loans into two types.
- Type I: the new loan, including the VA funding fee, does not exceed the payoff of the loan being refinanced. No equity comes out.
- Type II: the new loan, including the funding fee, is larger than the payoff of the loan or liens being refinanced. This is the version where you receive cash.
That is the entire test. You are not choosing a different product from a menu. The numbers on your own file put you in one type or the other.
One wrinkle trips people up. The funding fee counts toward the new loan amount when you finance it. A loan that sits right at the payoff can land in Type I if you pay the fee out of pocket, then tip into Type II if you roll the fee into the loan. VA Circular 26-19-05 confirms a financed fee is part of the loan amount for these purposes. Your loan officer should show you which side of the line your file falls on.
Side-by-Side
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or below payoff | Above payoff |
| Cash to the veteran | None | Yes, the difference after costs |
| Maximum loan | 100% of appraised value | 100% of appraised value |
| Mortgage insurance | None | None |
| Occupancy | Veteran certifies owner occupancy | Veteran certifies owner occupancy |
| Loan being paid off | VA or non-VA | VA or non-VA |
| Net tangible benefit | Required | Required |
| Fee recoupment (VA-to-VA) | Applies | Not a Type II requirement |
| Documentation | Full appraisal, credit, income | Full appraisal, credit, income |
Two rows deserve a note. Across the wholesale programs Lendmire places VA files with, the cash-out reaches 100% of the appraised value, financed funding fee included, and no mortgage insurance applies to either type. Credit and income are reviewed the same way for both. A 580 decision score is the floor on the wholesale programs we use, though VA itself sets no minimum score and lenders may set their own. Residual income, meaning the money left each month after your obligations, is the controlling test. All figures are subject to lender guidelines and full file review.
When Type I Is the Better Fit
Type I is the better fit when you do not need cash and still want what a VA loan offers. Here are the situations where it comes up.
You hold a non-VA loan and want to move to VA. Unlike an IRRRL (VA’s streamline for lowering the rate on an existing VA loan), a cash-out can refinance any loan type into VA. If your current loan is FHA or conventional, Type I lets you make the swap without pulling equity. Removing monthly mortgage insurance from the old loan is one of the ways a refinance can show a benefit.
You want to change the terms of a VA loan. A shorter term is another recognized benefit. A veteran who wants to build equity faster, with no cash taken, might fit here.
You want to keep your balance from growing. Type I leaves the loan at or below your payoff. Your equity stays where it is, apart from the costs of the refinance itself.
Type I carries guardrails that Type II does not. When you refinance a VA loan into a Type I, VA’s Handbook says certain fees and closing costs must be recouped within 36 months. That test exists to stop refinances that never pay for themselves. The Handbook also has a separate rate-reduction requirement for VA-to-VA Type I loans. Seasoning, the waiting period after the loan being refinanced originated, applies to cash-outs of VA loans. Ask your loan officer for the exact thresholds on your file.
One more point on the other side of the ledger. If you only want a lower rate on an existing VA loan and need no cash, the IRRRL is a separate category from both types. It is usually the simpler path for that goal, and it cannot give you cash.
For a closer look at the Type I rules, see Lendmire’s piece on Type I definitions and recoupment rules.
When Type II Is the Better Fit
Type II is the better fit when you want to turn home equity into cash. If that describes you, the VA cash-out refinance program is the route, and Type II is the version you will be in.
Here is how a veteran typically uses it.
Paying off high-cost debt. Folding other balances into one mortgage can simplify a budget. It also stretches short-term debt over a long loan, which is a real tradeoff.
Funding repairs or improvements. Cash from equity can pay for work on the home you live in. A VA appraisal sets the ceiling, so the home’s appraised value limits how much you can borrow.
Paying off a second lien. Because the new loan is compared with the payoff of all the liens being refinanced, a second mortgage can be folded in.
The mechanics are straightforward. The appraisal sets the value. The new loan can reach 100% of that value, financed funding fee included. Your cash is what is left after the payoff, any other liens, the funding fee, and closing costs. Because the funding fee is part of the loan, it reduces the cash available.
The funding fee on a cash-out refinance across the programs we place is 2.15% on first use and 3.3% on later use. It is waived for veterans receiving compensation for a service-connected disability and for the other exempt groups. Check whether you qualify for the waiver before you assume the fee applies.
Type II still needs a net tangible benefit. Federal regulation, 38 CFR § 36.4306, requires the lender to run a test showing the loan is in your financial interest, and the loan must meet at least one of the listed benefits. The regulation spells out the full list, and the lender must provide the test to you.
The Cost of Taking Cash
This is the part sales pitches skip. Type II raises your loan balance by the cash you take plus any financed fee. Your payment can rise even if the rate on the new loan is lower than the old one. Your equity shrinks by the same amount, and less equity means less cushion if home values slip or you want to sell.
Compare like with like. The CFPB’s action against a VA refinance marketer centered on misleading payment comparisons, such as setting a new payment without taxes and insurance next to an old payment that included them. When someone shows you a lower payment, ask whether both numbers include the same items.
Be wary of unsolicited offers too. A joint CFPB and VA warning described mailers that can look official while promising cash back, skipped payments, and no out-of-pocket costs. Any “no-cost” claim just means the costs are built into the rate or the balance. They have not disappeared.
Entitlement also matters. If an existing VA loan on the same property is being paid off, that entitlement can be restored for the new loan. If you have remaining entitlement tied up elsewhere, a different structure may apply, and a loan officer can review it with you.
Which Path Fits You?
Work through these questions in order.
1. Do you need cash? If yes, you are looking at Type II. If no, go to question 2.
2. Do you hold a VA loan and only want a lower rate? Look at the IRRRL first. It is a separate path and cannot give cash.
3. Do you hold a non-VA loan and want to move into VA? Type I is built for that.
4. Do you want to change terms, such as a shorter term, with no cash? Type I may fit. The 36-month recoupment test applies if you are paying off a VA loan.
5. Is the home your primary residence? Both types require you to certify that you will live in it. A refinance on a property with no existing mortgage or lien of record is not eligible for the VA guaranty.
If you do not need cash, ask yourself whether you are refinancing for a real benefit or because an offer sounded good. The net tangible benefit test exists because that second reason is common.
Key Terms Defined
Net tangible benefit (NTB): a test showing the new loan is in your financial interest, such as removing mortgage insurance, shortening the term, or lowering the interest rate.
Funding fee: a one-time VA fee that can be financed into the loan and is waived for exempt veterans.
Recoupment: earning back certain refinance costs through savings within a set period. For VA-to-VA Type I loans, that period is 36 months.
Seasoning: the waiting period after a loan originates before it can be refinanced.
Residual income: the money left each month after your mortgage, other debts, and living costs, which is the controlling test for VA loans.
Entitlement: the amount of guaranty VA backs for a veteran, tied to eligibility from the certificate of eligibility.
Mix-Ups That Cost Veterans Money
“Type II is a different program.” It is not. Both types sit inside the same VA cash-out refinance, and only the loan-versus-payoff comparison separates them.
“Cash-out means I get cash.” In VA’s terms, a Type I returns none. Only Type II does.
“An IRRRL can pull cash.” It cannot. It is a rate-reduction product for an existing VA loan.
“The cap is 90% of value.” That is an older limit still quoted online. The current rule is 100% of reasonable value, with a financed fee counted inside it.
“VA sets my credit score minimum.” VA publishes none. Lenders set their own floors, and some set higher ones than others.
The Balanced Verdict
Type I and Type II are not rivals. They answer different questions. If you want cash, Type II is the only one that delivers it, and your job is to decide whether the tradeoffs fit your budget: a bigger balance, a funding fee that eats into your proceeds, and less equity afterward. If you do not want cash, Type I can move you into VA or change your terms, but you carry the extra recoupment and rate-reduction tests when refinancing a VA loan, and the IRRRL may do the job more simply.
Whichever you choose, ask for a side-by-side of the old loan and the new one, with identical items in each. Underwriting, appraisal, and the net tangible benefit test apply either way. Every program figure here is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
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, so the lender reviews and decides on your file.
Frequently Asked Questions
What is the difference between Type I and Type II?
The difference is the size of the new loan against the payoff. Type I stays at or below the payoff, funding fee included, so no cash comes out. Type II goes above the payoff, and the difference is your cash after costs.
Does a Type I give me any cash?
No. A Type I returns no equity. VA files a swap from a non-VA loan into VA under cash-out as Type I, so you can have a “cash-out” loan with no cash at all.
Can I refinance a non-VA loan into a VA cash-out?
Yes. A VA cash-out can refinance any loan type into VA, provided there is an existing lien of record on the home. The loan being paid off does not have to be a VA loan.
Does the funding fee come out of my cash?
When you finance it, yes, indirectly. The fee is part of the loan amount, and the total must stay within 100% of the appraised value, so it reduces the cash available. Veterans receiving compensation for a service-connected disability, and other exempt groups, do not pay it.
Does Type II need an appraisal and full underwriting?
Yes. Both types are processed much like a purchase loan, with a full appraisal and review of credit, income, and residual income.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage serving homeowners and home buyers in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending channels; Lendmire brokers the financing and the lender underwrites each application. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. VA Lenders Handbook, Chapter 6
4. CFPB order on misleading VA cash-out payment comparisons
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: Can a Veteran With a Lower Credit Score Still Get a VA Loan? · VA Loan vs USDA Loan for a Veteran in a USDA-Eligible Area · How to Refinance a VA Loan Soon After Buying With an IRRRL
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.