The Quick Read: The lender sorts your file by one comparison: the new loan, funding fee included, against the payoff of the loan you are replacing. At or under the payoff, it is Type I. Over the payoff, it is Type II. The full underwriting is the same for both: credit, income, residual income, appraisal and a net tangible benefit.
That sorting step matters because it tells you what the loan is for. Type I usually means you are changing the structure of your loan, not taking cash. Type II means you are turning equity into cash.
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.
For the program basics, see Lendmire’s VA cash-out refinance program page.
Key Takeaways
- The Type I or Type II label depends on loan size against the payoff, and the VA funding fee counts in that size.
- Both types get full underwriting. Neither is a streamlined loan.
- Both types must pass a net tangible benefit test, meaning the loan has to work in your financial interest.
- Recoupment and the half-percent rate-reduction test belong to the IRRRL, VA’s streamline refinance. They do not apply to the VA cash-out.
- A “cash-out” loan can put no cash in your pocket. Type I often does exactly that.
Key Terms Defined
Payoff: the amount needed to retire the loan you are refinancing, including what the lender counts as owed at closing.
Type I: a VA cash-out where the new loan amount, including the VA funding fee, does not exceed the payoff.
Type II: a VA cash-out where the new loan amount, including the funding fee, exceeds the payoff.
Net tangible benefit (NTB): a test showing the new loan serves your financial interest. VA lists eight qualifying benefits, and the loan must meet at least one.
Residual income: what is left of your monthly income after taxes, debts and the basic costs of the home. It is the controlling test in VA underwriting.
Seasoning: the waiting period after you start paying on a VA loan before you can refinance it.
Funding fee: a one-time VA charge that can be financed into the loan and is waived for exempt veterans.
Certificate of Eligibility (COE): the VA document confirming you have the entitlement to use the benefit.
What Is the Difference Between Type I and Type II?
Type I and Type II differ in one thing: the new loan compared with the payoff. That comparison decides how the file is treated and what the loan accomplishes for you.
Congress created the split in a 2018 law. VA’s rulemaking on cash-out refinance loans notes VA had not previously separated cash-out loans by whether the new loan came in above or below the payoff. VA’s own circular on the change, VBA Circular 26-19-05, sets the definitions plainly.
- Type I: the new loan, including the funding fee, does not exceed the payoff.
- Type II: the new loan, including the funding fee, exceeds the payoff.
Here is the part that surprises people. A Type I loan is processed through the cash-out program, but you may walk away with no cash at all. It can move you from an FHA, USDA or conventional loan into a VA loan. It can change your term or your loan structure. It is “cash-out” in program name only.
Type II is the version most people picture. You borrow more than you owe, and the difference comes to you in cash. Across the wholesale programs Lendmire places VA files with, the VA cash-out reaches 100% of the appraised value, funding fee included, and it refinances any loan type into a VA loan.
How Does Underwriting Work, Step by Step?
Underwriting a VA cash-out follows one sequence for both types. The type label shows up at the classification and benefit steps. Credit, income and appraisal are judged the same way either way.
Step 1: Eligibility and occupancy. You need a COE, and you must live in the home you are refinancing. VA’s cash-out page also reminds borrowers that the loan comes from a private lender, not from VA, and that VA guarantees part of it.
Step 2: Credit and income. This is the full file, not a streamline. VA sets no minimum credit score. The wholesale programs Lendmire places VA loans with start at a 580 decision score, and some lenders set a higher floor. A file with a lower score needs a different lender or a different program.
Step 3: Residual income and debt-to-income. Residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it is workable only when residual income sits well above the table for your family size and region.
Step 4: Payoff and classification. The lender totals the payoff and the funding fee, then compares that to the new loan amount. This is where Type I or Type II is set.
Step 5: Net tangible benefit. Both types must pass. More on this below.
Step 6: Seasoning, if a VA loan is being paid off. The VA loan you are replacing must have aged enough. In the programs Lendmire works with, that means the later of 210 days from the first payment and the sixth payment. Seasoning applies to both types when the payoff is a VA loan.
Step 7: Appraisal. A VA appraisal sets reasonable value, which caps how much you can borrow. The cash-out is not an IRRRL, so the no-appraisal shortcut does not apply.
Step 8: Disclosure. Under VA’s rule, 38 CFR 36.4306, the lender must give you a loan comparison and disclose the equity you are removing. Read it. It shows what the new loan trades away.
The Master Comparison: Which Tests Hit Which File?
The tests that change from file to file are seasoning and the nature of the benefit. Credit, income, residual income and appraisal stay constant. This table shows the pattern across the three common file shapes.
| Test | Type I, VA payoff | Type I, non-VA payoff | Type II |
|---|---|---|---|
| Full credit and income review | Yes | Yes | Yes |
| Residual income | Yes | Yes | Yes |
| VA appraisal | Yes | Yes | Yes |
| Net tangible benefit | Yes | Yes | Yes |
| Seasoning of old loan | Yes | Not applicable | Yes, if VA payoff |
| Cash to borrower | Usually none | Usually none | Yes |
The non-VA column deserves a note. Seasoning is tied to a VA loan being refinanced. If you are paying off an FHA, USDA or conventional loan, there is no VA seasoning clock to run, but the net tangible benefit and everything else still apply.
What Is the Net Tangible Benefit Test?
The net tangible benefit test asks one question: does this loan serve your financial interest? Every VA cash-out has to answer it, Type I or Type II.
The regulation requires the lender to give you the test, and the test has to be satisfied. VA’s 2023 lender conference presentation says the loan must meet at least one of the benefits listed in the rule. Some examples:
- Eliminating monthly mortgage insurance.
- Moving to a shorter loan term.
- Moving to a lower interest rate.
That last item is a mechanic, not a promise. A lower rate qualifies as a benefit when the loan actually delivers it. A Type I from an FHA loan often clears the test by dropping FHA mortgage insurance, since VA loans carry no mortgage insurance.
One more point. VA’s rulemaking folded the old 90% loan-to-value ceiling into the benefit test, and treats keeping 10% equity as one criterion among many. It is no longer a hard cap. Across the wholesale programs Lendmire places files with, the VA cash-out reaches 100% of the appraised value, including the financed funding fee.
Why Does the Funding Fee Matter So Much?
The funding fee counts toward the Type I versus Type II comparison. That is the part borrowers miss, and it is the way a no-cash loan accidentally becomes a cash-out.
The fee for a VA cash-out refinance is 2.15% on first use and 3.3% on later use, and it is waived for veterans receiving compensation for a service-connected disability and the other exempt groups. You can finance the fee into the loan. Financing it raises the new loan amount, and that is what can push the total past the payoff.
Consider a borrower refinancing an FHA loan into VA with no cash taken out. If the borrower covers the funding fee and costs out of pocket, the new loan matches the payoff and the file reads as Type I. If the borrower finances the fee on top of the payoff, the loan exceeds the payoff and the file reads as Type II.
The exact line depends on how the lender counts the payoff, including interest and charges folded into it. Your loan officer should show you the classification before you choose how to pay the fee.
Three Worked Scenarios
Scenario one: structure change with no cash. A homeowner has a conventional loan with monthly mortgage insurance. Their home appraises well above the balance. They want VA to eliminate the insurance and take no cash. The new loan is sized at the payoff. This is a Type I from a non-VA loan. It clears the benefit test by removing mortgage insurance. No VA seasoning applies, because the loan being paid off is not VA.
Scenario two: the tipping point. A veteran with a VA loan wants to shorten the term. The loan has passed seasoning. They ask to finance the funding fee. That fee, added to the payoff, puts the new loan over the payoff. The file becomes Type II, even though no cash was requested. The fix is to bring cash for the fee, which restores Type I. If the veteran is exempt, the issue disappears.
Scenario three: real equity extraction. A homeowner with a VA loan and large equity wants cash for a major repair. The appraisal supports borrowing up to 100% of appraised value, funding fee included. The new loan exceeds the payoff, so it is Type II. It needs a net tangible benefit, full credit and income review, and the residual income test. The disclosure shows the equity leaving the home. If the veteran is not exempt, the 2.15% or 3.3% fee depends on first or later use.
Where the General Rule Breaks
A non-VA loan into VA. VA’s cash-out page confirms the loan can refinance a non-VA loan. Seasoning does not apply to the old loan, but the benefit test does.
Construction loans. VA’s cash-out option includes refinancing an interim construction loan into a permanent loan.
IRRRL versus cash-out. The IRRRL is for VA-to-VA only. It refinances an existing VA loan to a lower rate or from an adjustable to a fixed rate. There is no VA appraisal, and the fee is 0.5% unless you are exempt. The IRRRL also has looser occupancy rules in some cases, such as an active-duty spouse or dependent living in the home. The cash-out requires you to live there.
Recoupment and the rate-reduction test. Borrowers often hear these mixed into cash-out advice. Both are IRRRL rules. They do not apply to the VA cash-out. If a loan officer says otherwise for a cash-out, ask which program they are describing.
Entitlement. The refinancing portion uses the entitlement tied to the loan being refinanced. With full entitlement there is no VA loan limit. With remaining entitlement a down payment may be required, so speak with a loan officer about your own COE.
VA Rule or Lender Overlay?
Some limits come from VA. Others are a lender’s own choice. Knowing which is which helps you decide whether a “no” is final or just one lender’s answer.
| Item | VA rule | Lender overlay |
|---|---|---|
| Certificate of Eligibility | Required | Not applicable |
| Occupancy for cash-out | You live there | Not applicable |
| Net tangible benefit | Required | Not applicable |
| Minimum credit score | None set by VA | Programs start at a 580 decision score |
| Loan amount | No limit with full entitlement | Wholesale programs serve amounts to $4,000,000 |
An overlay is a lender’s extra requirement on top of VA’s. It varies by lender, which is why one lender may decline a file another will take. A broker that works with several wholesale lenders can match your credit profile and loan size to the program that fits. All figures are subject to lender guidelines and full file review.
Why Do VA Cash-Out Files Get Suspended or Denied?
- Seasoning not met. The VA loan being refinanced has not aged enough. Waiting solves it.
- Residual income short. The family’s leftover income sits below the table. Paying down a debt or reducing the loan amount can help.
- No qualifying benefit. The new loan does not meet any of the eight listed benefits. A different term or structure may.
- Appraisal shortfall. Value comes in under what the loan amount needed. Reduce the loan or bring cash.
- Occupancy problems. The home is not your residence.
- COE trouble. The certificate is missing or does not show the entitlement you assumed.
- Payoff shift at closing. Per diem interest, escrow items or a financed fee change the payoff or the loan amount, and the file flips between types. Ask for the classification again whenever numbers move.
Multiple liens being paid off are added together into the payoff total. The same comparison then applies.
How Does the Decision Look in Practice?
The decision comes down to what you want the loan to do. Pick the goal first, then let the type follow.
Want to drop mortgage insurance or leave an FHA or conventional loan for VA, with no cash? That is a Type I conversation. Want cash from equity? That is Type II, and the funding fee and a higher balance come with it. Want a lower rate on an existing VA loan with no cash and no appraisal? Ask about the IRRRL instead.
There is also the alternative of leaving your first loan alone. A home equity line leaves your VA loan in place and adds a second loan. The cash-out replaces the first loan entirely. Which is better depends on what your current loan has going for it. The best program for your situation depends on your credit, your equity and your goal.
Be cautious with offers that arrive in the mail, since some are misleading. Ask for the Loan Estimate and compare the full terms before you commit.
Frequently Asked Questions
Does a Type I loan skip the net tangible benefit test?
No. Both types must pass it. The test applies to VA cash-out loans generally, and the lender has to give you the test result. The loan must meet at least one of the eight listed benefits.
Can a Type I turn into a Type II?
Yes, and the funding fee is the usual cause. The fee counts in the comparison, so financing it on top of the payoff can push the new loan above the payoff. Paying the fee in cash keeps the loan at Type I. For veterans exempt from the fee, that particular cause does not arise.
Does a VA cash-out require an existing VA loan?
No. A VA cash-out can refinance an FHA, USDA, conventional or other non-VA loan into a VA loan. Seasoning is tied to a VA loan being paid off, so it does not apply to a non-VA payoff. The benefit test, appraisal and full underwriting still do.
Is the credit score minimum set by VA?
No. VA sets no minimum score. Lenders set their own, and some set a higher floor than others. The wholesale programs Lendmire places VA loans with start at a 580 decision score. Eligibility is subject to lender guidelines and full file review.
Do I have to live in the home?
Yes, for a cash-out. You must occupy the home you are refinancing. The IRRRL has different occupancy rules in some cases, such as an active-duty spouse or dependent living there. Ask which program fits your situation before you apply.
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, not a lender, so nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. 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
1. VA Loan Guaranty Conference, Refinancing Loans
4. VA.gov, Cash-out refinance loan
5. 38 CFR 36.4306, via govinfo
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: VA Cash-Out Refinance Requirements Without Selling the House · VA Cash-Out Refinance vs Conventional Cash-Out Under VA Type 1 and Type 2 Refinance Rules · How a Co-Borrower Buyout Works on a VA Cash-Out Refinance
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.