The Quick Read: Yes, if you hold VA entitlement, live in the home, pass full underwriting, and the new loan gives you a net tangible benefit. Type 1 versus Type 2 does not decide approval. It only labels the loan by comparing the new balance to the payoff. Approval depends on the tests below, and every figure is subject to lender guidelines and full file review.
What Do Type 1 and Type 2 Actually Mean?
Type 1 means the new loan, including the VA funding fee, does not exceed the payoff of the loan you are replacing. VA Circular 26-19-05 defines both this way.
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: 7.24% as of October 29, 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.
That is the whole distinction. It is arithmetic, not a separate program.
A Type 1 can put zero cash in your pocket. Say you owe a conventional lender and want out of that loan type and into a VA loan. If the new balance matches the payoff, VA still calls it a cash-out refinance. A Type 2 is what most people picture: you borrow more than you owe and keep the difference.
The VA’s own page says the program replaces your current loan with a new one under different terms. You get it through a bank, mortgage company, or credit union, not from VA directly (VA.gov). Lendmire’s VA cash-out refinance program page walks through how the loan is arranged through wholesale lenders.
Which Tests Decide Approval?
Five tests decide approval, and most apply to both types. Eligibility comes first, then occupancy, full underwriting, the appraisal ceiling, and net tangible benefit. Seasoning joins them only when the loan being paid off is itself a VA loan.
Here is how the main tests line up by what you are paying off:
| Test | Paying off a VA loan | Paying off a non-VA loan |
|---|---|---|
| Net tangible benefit | Yes | Yes |
| Seasoning | Yes | No |
| Full underwriting and appraisal | Yes | Yes |
| 100% value cap, fee included | Yes | Yes |
| Certificate of Eligibility | Yes | Yes |
Read down the columns, not across Type 1 and Type 2. The payoff type changes your test list more than the Type 1 or Type 2 label does.
One more point from file work. VA sets the floor, and lenders add their own overlays. Some lenders set a higher credit floor or a tighter value cap than VA allows. Across the wholesale programs we place VA files with, the decision-score floor starts at 580, subject to lender guidelines. VA itself sets no minimum score.
How Do You Tell Which Type Your Refinance Is?
Add the new loan amount and the financed funding fee, then compare the total to the payoff. At or below the payoff, it is Type 1. Above it, it is Type 2. Because the fee counts in the new loan amount, financing it can tip a deal across the line.
Run it as a picture. Say your payoff equals 90% of the home’s appraised value. You want the loan swap and nothing more. But you also roll in closing costs, and the VA funding fee gets financed on top. The new loan, fee included, now lands a little above the payoff. Type 2. You did not ask for cash, but the file is classified as if you did.
This is “type drift,” and it catches people off guard. A Type 1 plan can become a Type 2 once the numbers are final. Paying some costs out of pocket can keep a deal below the payoff. Whether that is smart depends on your cash and your goal.
The funding fee itself is mechanical. For a cash-out refinance it is 2.15% on first use and 3.3% on later use of the benefit. Veterans receiving compensation for a service-connected disability, and the other exempt groups, have it waived. VA publishes the schedule on its funding fee page. The fee counts toward the 100% cap, so financing it trims the cash you can take.
What Is the Net Tangible Benefit Test?
Net tangible benefit means the new loan must be in your financial interest, and it applies to every VA cash-out. 38 CFR 36.4306 sets that requirement, and the Type 1 and Type 2 circular confirms it covers all cash-out refinancing loans. The loan must meet one of VA’s eight listed benefits.
You do not need all eight. You need one. The ones that come up most often:
- Eliminating monthly mortgage insurance from the loan you are replacing.
- Moving from an adjustable rate to a fixed rate.
- A lower payment or lower rate than the loan being paid off.
- A loan at 90% or less of the home’s reasonable value.
VA’s lender conference materials list the full set under the same regulation (VA Loan Guaranty Conference, Refinancing Loans).
The lender must also give you the test in writing early in the process and again at closing. It must explain how pulling equity out of the home affects you. Read that disclosure. It is the lender telling you, in VA’s required words, what you are trading.
A Type 2 that fails to meet any listed benefit is a problem you cannot paper over. Equity-for-cash alone does not satisfy the test. Some borrowers meet it by converting an adjustable loan to a fixed one, or by dropping mortgage insurance. Others fail it because the new balance is high and the payment rises with no offsetting benefit.
Does Seasoning Apply to You?
Seasoning applies only when the loan you are paying off is a VA loan. The new loan cannot be guaranteed until the later of 210 days after your first monthly payment on the old loan or the date of the sixth payment. The 2025 edition of 38 CFR 36.4306 carries the 210-day language.
If you are paying off a conventional, FHA, or USDA loan, VA’s seasoning rule does not apply. Some lenders still set a wait of their own. That is an overlay, not a VA rule, so ask.
Seasoning is the one failure you cannot repair. Everything else on this page can be tuned: the loan amount, the type, the documentation. A refinance that starts too early cannot be fixed afterward. It has to wait. For the longer version, Lendmire’s piece VA Cash-Out Waiting Period Rules After a Prior Refinance covers how the clock is counted.
What About Recoupment and the Rate-Reduction Test?
In the wholesale programs we arrange, the half-percent rate-reduction test and the fee-recoupment test are IRRRL rules, not cash-out rules. The IRRRL is the streamlined VA-to-VA refinance. People mix the two up constantly (understandably, since the names overlap).
Some older guidance, and some lender materials, describe a cost-recovery test tied to a Type 1 loan that pays off a VA loan. Your lender confirms which tests apply to your specific file. If a loan officer cites one, ask which document it comes from.
Here is how the two products differ:
| Feature | VA cash-out | IRRRL |
|---|---|---|
| Pays off | Any loan type | Existing VA loan only |
| Cash to borrower | Possible | None allowed |
| Appraisal | Required | Not required |
| Funding fee | 2.15% first use, 3.3% after | 0.5% |
| Net tangible benefit | Yes | Yes |
An IRRRL cannot give you cash, per VA’s IRRRL page. If you want money out, or you are leaving a non-VA loan, the cash-out is the route.
What Does Full Underwriting Look For?
A VA cash-out gets full credit underwriting. It is not treated like a streamline. The lender reviews credit, income, and the appraisal, and runs the standard VA credit tests.
Residual income is the controlling test. That is the money left each month after your major obligations and living costs, measured against a VA table that varies by family size and region. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table.
The test runs on the new payment. A Type 2 raises your balance, so the payment generally rises with it. That makes underwriting scrutiny heavier as the loan grows.
Other file items:
- Certificate of Eligibility (COE). VA’s COE decides eligibility, and service requirements are VA’s rules.
- Occupancy. The home must be where you live, or where your spouse or dependent lives if you are on active duty.
- Appraisal. VA will not guarantee a refinance above 100% of the reasonable value on the Notice of Value, fee included.
VA’s wording is that you can refinance a first mortgage on the home you own and occupy (VA Purchase and Cash-Out page). If your title question is about a rental or second home, the answer is one sentence: occupancy decides the leverage, and this program is for the home you live in.
Where Does Approval Break?
Most denials and stalls trace to a short list. Some can be fixed. Some cannot.
- Type drift. Adjust the loan amount or pay some costs in cash.
- Residual income short. Pay down debts or reduce the requested amount.
- Appraisal comes in low. The 100% cap shrinks the loan. Reduce the cash taken or ask about a review.
- Missing COE. Request one before applying.
- Seasoning on a VA payoff. The 210-day and sixth-payment clock has to run out.
- No net tangible benefit. If the loan meets none of the eight, the structure has to change or the deal does not work.
- Credit below the lender’s floor. Wholesale programs start at a 580 decision score, and some lenders add more.
Notice the pattern. The expensive mistakes are the ones that happen before the application, like refinancing too early or assuming the loan type satisfies the benefit test.
Which Fits Your Goal: Type 1 or Type 2?
Type 1 fits if you want to move out of an existing loan type or get an adjustable loan fixed without pulling equity. Type 2 fits if you need cash and accept a larger balance. Neither is better. They answer different questions.
| Your goal | Likely type | Main tradeoff |
|---|---|---|
| Swap a conventional loan for VA | Type 1 | Funding fee, no cash |
| Convert adjustable to fixed | Type 1 | Costs vs. benefit |
| Fund a large expense | Type 2 | Equity consumed |
| Drop mortgage insurance | Either | Fee vs. savings |
Here is the thinking-out-loud part. A veteran with a low payment and a lot of equity could argue against Type 2 entirely. The cash is useful, but giving up a strong existing loan to get it is a real cost. The other side: someone carrying high-cost debt may come out ahead by consolidating it into the home loan. It is a toss-up that depends on the numbers, and the lender’s equity disclosure exists to force that conversation.
Taking equity out shrinks your cushion. The cap is 100% of the appraised value, so a full-value cash-out leaves no equity at all. That is allowed. Whether it is wise is your call.
Three Walk-Throughs
Each scenario uses percentages and plain words, no dollar figures.
Scenario 1: Conventional to VA, no cash. A veteran owes a conventional loan and holds a COE. Rolled together, the new loan and financed fee match the payoff. Type 1. Seasoning does not apply because the old loan is not VA. The veteran needs one net tangible benefit, and dropping monthly mortgage insurance qualifies. Full underwriting still applies.
Scenario 2: VA to VA, taking cash. A veteran with a VA loan wants cash. The new loan, fee included, exceeds the payoff. Type 2. The 210-day and sixth-payment seasoning test applies because the payoff is a VA loan. Net tangible benefit applies. Residual income is tested on the larger payment.
Scenario 3: The accidental Type 2. A veteran plans a loan swap with no cash. Costs and the funding fee are financed, and the final number lands above the payoff. The file becomes Type 2. The fix was to bring some cash to closing or rework the request before the file went in.
Key Terms Defined
Net tangible benefit: a financial gain VA requires from the new loan, met by one of eight listed benefits.
Seasoning: the waiting period before a VA loan can be refinanced into a new VA-guaranteed loan, the later of 210 days after the first payment or the sixth payment.
Residual income: the money left each month after major obligations and living costs, compared to a VA table.
Certificate of Eligibility (COE): the VA document proving you qualify for the benefit.
Funding fee: a one-time VA charge, financeable and waived for exempt veterans.
IRRRL: the VA-to-VA streamline refinance that allows no cash out.
Before You Apply: A Short Checklist
- Get your COE, and confirm the home is your primary residence.
- Identify what you are paying off, and whether it is a VA loan.
- If it is, check the 210-day and sixth-payment seasoning date.
- Name your net tangible benefit before you apply.
- Decide whether you want cash, and whether that changes the type.
- Ask the lender about its overlays beyond VA’s rules.
- Watch for mailers that look official. VA and the CFPB warned borrowers about refinance offers that appear official and sound too good to be true (CFPB and VA warning).
Frequently Asked Questions
Do I have to take cash out on a VA cash-out refinance?
No. A Type 1 can take no cash at all. Swapping a conventional, FHA, or USDA loan into a VA loan is still processed as a cash-out refinance. The label reflects the loan category, not whether money changes hands.
Does Type 2 get less scrutiny than a streamline?
No, the reverse. A Type 2 gets full underwriting, a VA appraisal, and a residual income review on the larger payment. The IRRRL is the product with lighter documentation, and it allows no cash.
Can I use the 100% limit to borrow every dollar of my equity?
Yes, up to 100% of the appraised value with the funding fee included, subject to lender guidelines. Some lenders set a lower cap. The fee counts inside the cap, so financing it reduces the cash you take.
Does the wait apply if I am paying off a conventional loan?
VA’s seasoning rule does not. It applies only when the loan being paid off is VA-guaranteed. A lender may still set its own wait, so ask before you plan around a date.
Is there a minimum credit score?
VA sets none. Lenders add their own floors. Across the wholesale programs Lendmire places VA loans with, the decision-score floor starts at 580, subject to lender guidelines and full file review.
If You Are Weighing Your Options
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. The decision turns less on the Type 1 or Type 2 label than on what you are paying off, what you need, and what you are willing to give up in equity.
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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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
2. VA.gov: Cash-out refinance loan
3. VA funding fee and closing costs
5. VA Loan Guaranty Conference, Refinancing Loans
6. 38 CFR 36.4306 (govinfo, 2025 edition)
8. VA Purchase and Cash-Out page
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’s Family Qualify for a VA Cash-Out Refinance? · Best VA Cash-Out Refinance Program Without Monthly PMI · Top VA Cash-Out Refinance Providers With the Fastest Approval on a VA Cash-Out
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.