How to Switch From an FHA Loan to a VA Cash-Out as a Veteran

The Quick Read: A veteran can replace an FHA loan with a VA-backed loan, and VA treats that move as a cash-out refinance. You do not have to take any cash. A swap with no cash back is the usual version, and it can remove the monthly FHA mortgage insurance. The VA streamline will not work here because it only refinances an existing VA loan.

What Does “Cash-Out” Mean If I Take No Cash?

“Cash-out” is a VA product category, not a requirement to pull money out. VA says a cash-out refinance replaces your current loan with a new one on different terms. The same VA cash-out refinance page says it can be used to take equity out or to refinance a non-VA loan into a VA-backed loan.

An FHA loan is a non-VA loan. So the only VA door out of FHA is the cash-out product. The streamline (the IRRRL) is built for VA-to-VA refinances. An FHA borrower cannot use it.

Under VA Circular 26-19-05, a cash-out where the new loan, funding fee included, does not exceed the payoff of the old loan is a Type I. One that exceeds the payoff is a Type II. A straight FHA-to-VA swap with no cash back is Type I. The circular is dated, and VA’s rules may have moved into the federal regulations since, so a lender will confirm which standards apply to your file today.

Key Terms Defined

Certificate of Eligibility (COE): The VA document that confirms your service qualifies you for a VA-backed loan.

Entitlement: The amount of VA guaranty you have available, which can be reduced if another VA loan is still using it.

Net tangible benefit (NTB): A test showing the new VA loan actually improves your position in a defined way.

Funding fee: A one-time VA charge, a percentage of the loan, that is higher for repeat use and waived for exempt veterans.

Reasonable value: The value the VA appraisal assigns to the home, which sets the ceiling on the new loan.

Type I and Type II: Type I does not exceed the old loan’s payoff. Type II does.

How Does the Switch Work, Step by Step?

The process follows a fixed order. Each step has a document behind it, and gaps in those documents are what stall these files.

1. Get the COE. Eligibility comes from your service record, not from the lender. A cash-out needs the Certificate of Eligibility (COE), so pull it first, because a lender cannot start without it.

2. Apply for full underwriting. Unlike the streamline, a cash-out is fully underwritten on credit and income. VA does not lend. Private lenders make the loan and set their own overlays on top of VA’s rules. Across the wholesale programs Lendmire places files with, a veteran should expect the same income, credit and residual-income review a purchase would get.

3. Order the VA appraisal. A VA appraisal sets reasonable value on every cash-out, including a swap with no cash taken. The loan ceiling is 100% of that value, and a financed funding fee counts toward it. Many lenders cap leverage lower than the VA ceiling.

4. Pass the net tangible benefit test. The new loan has to meet at least one listed benefit. Removing monthly mortgage insurance is one of them, and an FHA-to-VA swap can do exactly that. Other listed benefits include a shorter term or converting an adjustable loan to a fixed one.

5. Review the disclosures. Expect loan-comparison disclosures from the lender, along with the standard Loan Estimate and Closing Disclosure for a consumer mortgage.

6. Close and pay off the FHA loan. The new VA loan pays the FHA loan off in full. Closing costs and the funding fee can usually be financed, subject to the value ceiling.

What decides the outcome: your COE and entitlement, credit and residual income, appraised value against the payoff, whether at least one benefit test is met, and the lender’s overlays.

What Happens to the FHA Mortgage Insurance?

The monthly FHA premium ends when the FHA loan is paid off. On a VA loan, there is no monthly mortgage insurance and no down payment requirement, as the VA cash-out page states. That is the main budget lever in this switch.

Here is the mechanical picture from the FHA side. FHA carries an upfront premium of 1.75% of the base loan, usually financed, plus an annual premium between 0.15% and 0.75% of the balance. On a thirty-year loan above 90% loan-to-value, the annual premium lasts the full term. At or below 90%, it ends after eleven years. A veteran with an older FHA loan still above 90% LTV is the person paying that premium longest.

Now the catch. HUD’s FHA homeowners refund fact sheet describes a possible refund of the upfront premium on an FHA-to-FHA refinance, applied as a credit toward the new loan’s upfront premium. A VA payoff is not an FHA refinance. Confirm the wording with your lender before assuming any refund, but plan as though the upfront premium you paid is a sunk cost.

What Does the VA Funding Fee Do to the Math?

VA charges a one-time funding fee on most cash-outs. It is a percentage of the loan. It runs higher for repeat use of the benefit, and it does not depend on your equity. It can be financed into the loan. Veterans receiving service-connected disability compensation are generally exempt, so confirm your status on VA.gov before you budget.

Financing the fee and any cash taken increases the balance. A larger balance can raise the payment even without mortgage insurance, and it reduces equity. So the switch is not automatically a win. Run it on your own numbers: the monthly mortgage insurance you stop paying against the one-time fee, the closing costs and the larger balance. The break-even is the point at which the mortgage insurance you stop paying has added up to more than the fee and closing costs you take on.

If you expect to sell or refinance again before reaching that break-even, staying put may be the better call. Your Loan Estimate will show the actual costs, and the comparison should use those figures, not a rule of thumb.

Take Cash or Take None?

A no-cash swap is Type I. Taking cash makes it Type II. The tradeoff is practical.

Taking cash raises the balance, raises the loan-to-value and puts more weight on the benefit test. The circular says VA no longer guarantees refinances above 100% of value, and the lender may stop well short of that. If the goal is only to shed FHA insurance, take no cash. If you have a real use for the money, size the cash to that use.

The FHA cash-out reaches 80% loan-to-value on a home you have owned and occupied for 12 months before the case number. The FHA Streamline refinances an existing FHA loan with no appraisal and a limited credit review, but it requires a net tangible benefit and the premium continues. Neither removes mortgage insurance the way the VA route can.

Where Does the General Rule Break?

Seasoning. The seasoning rule in the circular covers VA-to-VA cash-outs. An FHA payoff is not subject to it. Lenders can still add their own timing overlays.

Recoupment. A recoupment test, recovering fees through lower payments, is aimed at VA refinances. Because the old loan is FHA, treat the application of that test as lender-specific and ask directly.

Entitlement. If another VA loan is still using part of your entitlement, the lender has to work out what remains. Bring the details of that loan to the first conversation.

Occupancy. The VA cash-out is for a primary residence. If the home is now a rental or a second home, this route generally does not fit, and VA’s treatment of service members who have moved out should be confirmed with the lender before you plan around it.

Lender leverage caps. VA allows up to 100% of reasonable value. Many lenders set lower caps. The cap you can actually use is the lender’s, not VA’s.

A non-veteran co-borrower. This changes how entitlement and guaranty are calculated. Raise it at the start so the lender can structure the file correctly.

What Slows or Sinks These Files?

Most problems are documentation or value problems, not eligibility problems.

• Certificate of Eligibility.
• Pay stubs, tax documents and bank statements.
• A current FHA mortgage statement showing the payoff.
• Details of any second lien.
• Records of any other VA loan using entitlement.

Who Should Switch, and Who Should Stay?

Switch candidates tend to share a profile: an FHA loan with ongoing mortgage insurance, solid credit and income, enough value to clear the appraisal, and a plan to stay in the home long enough to recover the one-time costs.

Stay-put candidates include borrowers expecting to sell soon, borrowers whose balance would rise sharply from financing the fee and costs, and veterans whose appraised value would land below the payoff. If your only goal is a different term on the same FHA loan, the FHA Streamline may fit better.

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. Lendmire is a mortgage broker and arranges these loans through wholesale lenders; nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

About Lendmire

Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. VA.gov: Cash-out refinance loan

2. VA Circular 26-19-05

3. HUD: FHA Homeowners Fact Sheet on Refunds