The Quick Read: The choice comes down to one comparison: the new loan amount, funding fee included, against the payoff of what you are replacing. At or below the payoff, it is Type I and you walk away with no cash. Above the payoff, it is Type II and the difference comes to you as cash. If you want cash, you are in Type II. If you only want a better loan, Type I is usually the cleaner fit, subject to lender guidelines and full file review.
What Do Type I and Type II Actually Mean?
Type I means the new loan does not exceed the payoff. Type II means it does. That is the whole definition.
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.
VA’s Lenders Handbook, Chapter 6 says the type is set by the payoff amount of the loan being refinanced compared with the principal amount of the new loan. The new loan amount includes the financed VA funding fee. Congress created the split in Public Law 115-174, which is why the two names exist at all.
Both types sit under the cash-out program. Both can pay off any loan type: conventional, FHA, USDA, or an existing VA loan. That is how a non-VA borrower moves into a VA loan. Both can also pay off liens of record, like a second mortgage. Here’s the catch: a home with no existing mortgage or lien is not eligible for a VA-guaranteed refinance.
Picture a homeowner whose new loan amount, which includes the financed funding fee and rolled-in costs, comes to no more than the payoff of the existing loan. That is Type I. Raise the new loan even a little above the payoff, and the file becomes Type II. Costs and fees count toward the new loan amount, so they are part of the comparison, not a separate step.
Quick Comparison Table
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or below | Above |
| Cash to borrower | None beyond payoff | Yes, the excess |
| Net tangible benefit | Required | Required |
| Fee recoupment test | Yes, VA-to-VA | No |
| Rate-reduction test | Yes, VA-to-VA | No |
| Best fit | Better loan, no cash | Equity access |
How Is the Loan Underwritten, Step by Step?
Underwriting is the same full review for both types. Across the wholesale programs Lendmire places VA files with, the order runs like this.
1. Eligibility. You need a Certificate of Eligibility, and you must live in the home. VA’s cash-out page says you must meet VA’s and the lender’s standards for credit and income.
2. Payoff identification. The lender lists every loan and lien being paid off. The payoff sets the line that decides your type.
3. Loan amount. Payoff, plus the financed funding fee, plus any costs rolled in. Stay at or under the payoff and it is Type I. Go over and it is Type II.
4. Appraisal. VA’s reasonable value on the Notice of Value is the base for the value ceiling.
5. Credit and income review. Residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. VA sets no minimum credit score, but the wholesale programs Lendmire works with start at a 580 decision score. Some lenders set a higher floor.
6. Net tangible benefit test. The new loan has to be in your financial interest, and the lender must show the comparison.
7. Closing. On Type II, cash goes to you only if the loan exceeds payoff plus costs.
The VA cash-out reaches 100% of the appraised value, funding fee included. With full entitlement there is no VA loan limit, and the wholesale programs serve amounts to $4,000,000. Nothing here is a commitment to lend. Every figure depends on lender guidelines and full file review.
For the full program picture, see Lendmire’s VA cash-out refinance program page.
What Tests Does Type I Add?
Type I carries two extra tests when the loan being paid off is a VA loan. The Handbook labels them “VA-to-VA, Type I only.”
The first is fee recoupment. It applies to Type I regardless of interest rate or loan term. The second is a required rate reduction, set by statute. The exact minimums depend on the loan types involved, so have the lender show you the figure for your file.
Seasoning applies too. VA Circular 26-19-05 says seasoning applies to cash-out loans that refinance a VA-guaranteed loan. The wholesale programs measure it as the later of 210 days from the first payment and the 6th payment, and it covers both types.
Type II skips the recoupment and rate-reduction tests. It still needs the net tangible benefit. That is the part people miss. A Type II is not “easier” across the board. It just tests different things.
How is recoupment measured?
In plain terms, the fees and costs are divided by the monthly drop in the principal-and-interest payment. The answer is the number of months it takes to earn the costs back. VA’s proposed IRRRL rule in the Federal Register explains the approach, and it excludes taxes, escrow amounts and funding fees. That proposal covers IRRRLs, so use it as background for the method. Your lender runs the actual test.
What Counts as a Net Tangible Benefit?
Net tangible benefit means the new loan is in your financial interest. The regulation, 38 CFR 36.4306, requires the lender to give you the test, and it must be satisfied. The list includes:
- Eliminating monthly mortgage insurance
- A shorter loan term
- A lower interest rate
- A lower payment
- An increase in monthly residual income
- A new loan at or below 90% of reasonable value
- Refinancing an interim construction or repair loan
- Converting an adjustable rate to a fixed rate
Most Type II files qualify through the 90% route or through residual income. Most Type I files qualify through a lower payment or a switch out of mortgage insurance. Here is the misunderstanding to avoid: 90% is not a cap. VA’s ceiling is 100% of reasonable value. Ninety percent is one way to satisfy the benefit test.
The lender gives you the comparison in a standard format at application and again at closing. Read both. If the numbers on the early version and the closing version differ, ask why.
How Do You Choose? A Decision Path
Start with your goal, then work down.
1. Do you want cash? No cash means Type I is the natural fit. Cash means Type II.
2. Is your current loan a VA loan? If yes, Type I brings the recoupment and rate-reduction tests. Type II avoids them. That can change which type you can actually get through.
3. Is your current loan conventional, FHA or USDA? The extra Type I tests are labeled VA-to-VA, so they work differently here. Ask your lender to confirm how they apply to your payoff. A Type I from a non-VA loan is a clean way to move into VA with no cash taken. An IRRRL cannot do that, since it only refinances an existing VA loan.
4. Which benefit test will you meet? Name the specific one before you start. Dropping mortgage insurance, shortening the term, or landing at or below 90% of value are common routes.
5. Does it fit inside 100% of value? The funding fee counts toward that ceiling.
If you only want to reduce your payment on an existing VA loan and have no need for cash, ask about an IRRRL too. It is designed to refinance an existing VA loan, including moving from an adjustable to a fixed structure, with no VA appraisal required and a funding fee unless exempt. It is a different program with its own seasoning and net tangible benefit requirements. The cash-out requires an appraisal and full underwriting.
Scenarios
The mortgage-insurance exit. Say you own a home with an FHA loan and want out of monthly mortgage insurance. You need no cash. A Type I VA cash-out pays off the FHA loan. VA loans carry no mortgage insurance of any kind. The net tangible benefit is the insurance drop.
The small cash need. Picture a veteran with a VA loan who needs a modest sum for a repair. Because it is Type II, the 36-month recoupment test and rate-reduction test do not apply. The benefit test and residual income still do, and the balance goes up.
The big equity pull. Consider a homeowner with a conventional loan and substantial equity who wants to consolidate other debt. Type II fits. The loan can reach 100% of appraised value, funding fee included. Whether the budget supports it is a residual income question.
The tight payment goal. Run the thinking for a borrower whose only goal is a lower payment. Type II adds balance, so a lower payment is not assured. Type I is the likelier path, and the recoupment test confirms the costs earn back.
Staying Under the Line
The funding fee can tip a loan from one type to the other. Because the fee is financed and counts in the new loan amount, a loan that looked like a no-cash Type I on the payoff alone can land above it once the fee and rolled-in costs are added.
Know the fee tiers. The cash-out refinance fee is 2.15% for first use and 3.3% for subsequent use, applied to the full new loan amount. It is waived for veterans receiving compensation for a service-connected disability and for the other exempt groups. These are program figures, not a price quote, and they depend on your file.
Also, the funding fee can push a loan over 100% of value. VA Circular 26-18-30 says the borrower must pay any amount above 100% of value at closing. Ask your lender to run the number with the fee included before you pick a loan size.
Edge Cases Where the Rule Bends
- Construction-to-permanent loans. The circular says the cash-out rules cover refinancing of construction loans, whether or not the principal amount changes.
- Type I with no cash. It is a cash-out label that works like a rate-and-term refinance.
- Seasoning on VA payoffs. A cash-out is not guaranteed if the VA loan being paid off has not met seasoning.
- Occupancy. VA requires you to live in the home. If your situation involves a spouse or dependent living there during your service, ask the lender and verify it against VA’s rules.
- Subsequent use. Using entitlement again moves you to the higher funding fee tier, unless exempt.
Key Terms Defined
Payoff amount: The total owed on the loan and liens being paid off.
Net tangible benefit: A test showing the new loan is in your financial interest.
Recoupment: The time it takes monthly savings to earn back fees and costs.
Seasoning: The minimum time and payment history on a loan before you can refinance it.
Funding fee: A one-time VA charge that can be financed, with exemptions for some veterans.
Residual income: What is left of monthly income after debts and living costs, and VA’s controlling test.
Common Mistakes
- Assuming Type I means stricter rules in every case. The extra tests are VA-to-VA only.
- Assuming Type II carries Type I’s tests. It does not.
- Treating the lender’s comparison as the final word. The CFPB penalized a lender for misleading cost comparisons on VA cash-out refinances. Check that the new-loan payment includes everything it should.
- Ignoring the funding fee in the loan size.
- Skipping the document list.
Gather these before you decide: your current payoff statement, your loan type, your first payment date, your Certificate of Eligibility, and a clear figure for how much cash, if any, you need.
Frequently Asked Questions
Does Type I give me any cash?
No. Type I means the new loan does not exceed the payoff, so you receive no cash beyond paying off the old loan. It works like a rate-and-term refinance filed under the cash-out program.
Can I use Type I to leave an FHA or conventional loan?
Yes, subject to lender guidelines. Type I can pay off a non-VA loan, which an IRRRL cannot. The extra recoupment and rate-reduction tests are labeled VA-to-VA, so confirm with your lender how they apply to your payoff.
Is the 36-month recoupment rule for every VA cash-out?
No. The Handbook ties it to Type I when refinancing a VA loan. Type II does not carry it.
Does VA cap cash-out at 90% of value?
No. The ceiling is 100% of reasonable value, funding fee included. The 90% figure is one way to meet the net tangible benefit test. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
Does VA set the minimum credit score?
No. The floor is lender policy. The wholesale programs Lendmire places VA loans with start at a 580 decision score, though lenders set their own.
Next Step
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.
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 (VAP26-7) Chapter 6, Refinancing Loans
2. VA.gov cash-out refinance loan page
4. VA’s proposed IRRRL rule in the Federal Register
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: How to Meet VA Cash-Out Refinance Seasoning Before You Apply · Is a VA Cash-Out Refinance Type II Worth It Over Type I? · VA Cash-Out Refinance Requirements Versus a VA Streamline
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.