The Quick Read: The two types differ on one point: how the new loan compares with the payoff of the loan you are replacing. Type 1 is for borrowers who want a better loan structure and no cash back. Type 2 is for borrowers who want to take cash from home equity. Both need a VA Certificate of Eligibility, a full appraisal, full underwriting, and a “net tangible benefit.” That means the new loan has to leave you better off in a way VA recognizes. Every figure here is subject to lender guidelines and full file review, and nothing is a commitment to lend.
Key Takeaways
- Type 1: The new loan, funding fee included, does not exceed the payoff. You get no cash back.
- Type 2: The new loan exceeds the payoff. The difference reaches you as cash.
- Both types: Up to 100% of appraised value, including a financed funding fee. No mortgage insurance. Residual income is the controlling test.
- Type 1 can switch loan types: A conventional or FHA loan can become a VA loan with no cash taken out.
- Not a streamline: Both types need a full appraisal and full underwriting.
Side-by-Side
This table shows what each type shares and where they split.
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: 7.18% as of November 5, 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.
| Factor | Type 1 | Type 2 |
|---|---|---|
| New loan vs. payoff | At or below payoff | Above payoff |
| Cash to you | None | Yes, from equity |
| Mortgage insurance | None | None |
| Net tangible benefit | Required | Required |
VA sets no minimum credit score of its own. The wholesale programs Lendmire places VA loans with start at a 580 decision score, and some lenders set a higher one. The funding fee is financeable, and veterans receiving compensation for a service-connected disability, along with other exempt groups, do not pay it.
The table splits on the first two rows and matches on the last two: neither type carries mortgage insurance, and both require a net tangible benefit. The type tells you whether you walk away with cash. It also decides which paperwork the lender runs and which payoff-source rules apply.
Lendmire’s VA cash-out refinance program page covers the program basics. Lendmire is a mortgage broker. It arranges these loans through wholesale lenders and does not lend the money itself.
How VA Tells Type 1 From Type 2
VA sorts the loans with one comparison. In its lender briefing on cash-out refinances, the test is the new loan amount against the payoff of the loan being refinanced. At or below the payoff is Type 1. Above the payoff is Type 2.
The funding fee counts toward that comparison. If you finance the fee, it sits inside the new loan amount. That detail catches people. Picture a borrower who wants a clean swap with no cash. If the financed fee pushes the new balance above the payoff, the loan becomes Type 2 even though no cash was requested.
Here is a worked example in percentages of appraised value, with no dollar figures. Say your payoff equals 80% of the home’s appraised value.
- Type 1: The new loan, fee included, lands at 80% of value or less. It replaces the old loan and nothing more.
- Type 2: The new loan, fee included, lands above 80% of value, up to 100%. The amount above the payoff reaches you as cash, and a financed funding fee comes out of that amount.
In practice, the loan officer sorts out the fee first. The fee fits inside the payoff-sized loan, or it does not. If it does not, the loan is Type 2.
When Type 1 Is the Better Fit
Type 1 fits when the loan you have is the problem, not your cash needs. It suits three kinds of borrower.
The borrower with a conventional or FHA loan who wants to move into VA. A Type 1 can refinance any loan type into a VA-backed loan with no cash back. If you carry FHA mortgage insurance, that matters. A VA loan has no mortgage insurance of any kind, and removing monthly mortgage insurance is one of the benefits VA lists for the net tangible benefit test.
The borrower who wants a different loan structure. Maybe you hold an adjustable loan and want a fixed one. Maybe you want a different term. Type 1 changes the structure without adding to the balance.
The borrower who wants to stay conservative. A Type 1 does not raise what you owe beyond the payoff. The balance stays level, so the monthly obligation does not climb because of new borrowing.
Honest drawback: if you want cash, Type 1 gives you none. It also means you pay the funding fee, unless you are exempt, for a change in structure rather than money in hand. Run that tradeoff with a loan officer before you commit.
When Type 2 Is the Better Fit
Type 2 fits when you want to turn equity into cash. A true cash-out can reach 100% of the appraised value, including the financed funding fee. That is more room than most other cash-out programs allow.
It suits borrowers who want to:
- Pay off high-balance debts with equity and can handle a larger balance.
- Fund home repairs or improvements.
- Pull cash for another large goal, with a plan for the higher balance.
The wholesale programs Lendmire works with reach that 100% figure, subject to lender guidelines and the appraisal. A full appraisal sets the reasonable value, and the lender confirms the number.
Be honest with yourself about the other side. Because Type 2 raises the balance, the monthly obligation usually rises. VA’s test is residual income, the money left each month after taxes, debts, and living expenses. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table. A larger loan with a tight monthly budget is where a Type 2 file runs into trouble.
Taking all the cash VA allows is possible, but taking only what you need is often the better call. VA’s 100% ceiling is a limit, not a target.
What Both Types Require
The shared rules matter more than the label. These apply whichever type you pursue.
Eligibility. You need a Certificate of Eligibility from VA. VA’s cash-out refinance page explains that you get this loan through a private lender, not from VA directly. The home should be one you live in.
Net tangible benefit. The regulation, 38 CFR 36.4306, says the new loan must be in your financial interest. The lender runs a test, and at least one of eight listed criteria has to be met. Those include removing monthly mortgage insurance, lowering the payment, increasing residual income, refinancing a construction loan, refinancing an adjustable loan into a fixed one, and a new loan at or below 90% of reasonable value.
The 90% point. That last criterion is a way to pass the test, not a cap on the loan. A borrower above 90% of value needs a different benefit to pass. VA explained the history in its rulemaking notice on cash-out loans. Congress once set a 90% limit, and VA folded that figure into the benefit test while keeping the 100% ceiling.
Disclosures. The lender must give you the benefit test result and a comparison of the old and new loans. You see it early in the process and again at closing. Read it. It shows the loan amount against your payoff and the loan type, so you can see which side of the Type 1 and Type 2 line you landed on.
Seasoning. A waiting period after your current loan began can apply. On the wholesale programs Lendmire places, the VA cash-out carries the same seasoning test as the streamline refinance. Your loan officer confirms the count for your loan.
Underwriting. Expect the full process: credit, income, residual income, and a full VA appraisal. This is not a streamline.
Does the Old Loan Have to Be VA?
No. This is one of the most misunderstood parts of the program. The VA cash-out refinances any loan type into VA. A conventional or FHA loan is reviewed as the payoff.
Where the payoff comes from changes the file. VA-to-VA and non-VA-to-VA refinances are treated differently. Some tests run only when the old loan is VA-backed. A non-VA payoff leans heavily on the net tangible benefit, and the lender uploads the required cash-out disclosures for either type.
So you can sort your own situation by two questions. Is the new loan above your payoff? Is the old loan VA-backed or not? Those two answers tell your loan officer which path your file follows.
Key Terms Defined
Certificate of Eligibility (COE): The VA document that confirms you qualify for a VA loan. VA decides eligibility under its own service rules.
Net tangible benefit: A test showing the new loan puts you in a better financial position, using at least one of VA’s eight listed criteria.
Funding fee: A one-time VA fee, financeable into the loan. It is 2.15% on a first-use cash-out and 3.3% on later use, and exempt veterans do not pay it.
Residual income: The money left each month after your major obligations. It is the controlling test in VA underwriting.
Seasoning: A required waiting period after your current loan begins before you can refinance it.
Reasonable value: The value VA’s appraisal sets on the Notice of Value. The loan, fee included, cannot exceed 100% of it.
Common Myths
“VA caps cash-out at 90%.” It does not. The ceiling is 100% of reasonable value, and 90% is one way to pass the benefit test. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
“Cash-out means cash back.” Not always. A Type 1 can be a pure loan-type switch.
“Only one type needs a benefit test.” In fact, both types do.
“I need an existing VA loan.” You do not. Conventional and FHA loans can be refinanced into VA.
“It works like a streamline.” It does not. The streamline skips the appraisal, and the cash-out requires it, along with full underwriting.
“VA lends the money.” Private lenders do. VA backs the loan.
The Balanced Verdict
Pick Type 1 if you want the loan you have replaced with a better one and do not need cash. Pick Type 2 if equity is the goal and your monthly budget handles a bigger balance.
The type often falls out of the numbers rather than a choice. Your payoff, the financed fee, and the appraised value decide where the new loan lands. If you are close to the line between the two, trimming the loan amount or paying the fee out of pocket can move you back to Type 1. If you want cash, accept Type 2 and size the cash to the plan you have.
A borrower ready to start can also read Lendmire’s guide How to Qualify and Apply for a VA Cash-Out Refinance Under Type 1 and Type 2 Rules. The loan officer’s job is to run both versions of your file and show the difference.
Frequently Asked Questions
Does the funding fee change which type I get?
Yes, it can. The fee counts as part of the new loan amount when you finance it. If it pushes the loan above your payoff, the loan becomes Type 2. Paying the fee separately, or being exempt, keeps a no-cash loan in Type 1.
Can I do a VA cash-out if my current loan is conventional or FHA?
Yes, subject to lender guidelines. When you take no cash, it is Type 1. When you take cash, it is Type 2.
Is 90% the most I can borrow?
No. VA’s ceiling is 100% of reasonable value, fee included. The 90% mark is one way to pass the net tangible benefit test. Above it, the file has to meet a different benefit.
Do I need a minimum credit score?
VA sets none. The wholesale programs Lendmire places VA loans with start at a 580 decision score, and lenders may set a higher floor. Residual income remains the controlling test.
How is this different from a streamline refinance?
The streamline, called an IRRRL, only refinances an existing VA loan and skips the appraisal. The cash-out takes any loan type, needs a full appraisal, and goes through full underwriting.
Comparing 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.
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.
For your own numbers, request a scenario review with Lendmire.
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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
4. Federal Register: Revisions to VA-guaranteed or insured cash-out home refinance loans
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 Plan and Use a VA Cash-Out Refinance to Buy Out a Co-Owner · How to Qualify and Apply for a VA Cash-Out Refinance Choosing Between Type 1 and Type 2 · How to Document Equity 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.