VA Cash-Out vs FHA Cash-Out for a Service-Connected Veteran

The Quick Read: For most service-connected veterans who have remaining VA entitlement, a VA cash-out usually fits better. It carries no monthly mortgage insurance, and a veteran with a compensable rating may be exempt from the funding fee. FHA cash-out still makes sense when VA is not available or does not fit the property, the lender, or the veteran’s use of entitlement. FHA is the more conservative loan on leverage, since it tops out at 80% LTV, and it adds both an upfront and an annual mortgage insurance premium.

Who is each option really for? VA cash-out is built for veterans, and the disability exemption makes it the stronger structure for many of them. FHA cash-out is open to any qualified owner-occupant, so it is the fallback when VA eligibility, entitlement, or appraisal results get in the way. Both loans are for the home you live in. Neither is for a rental.

The details below come from the wholesale programs Lendmire places FHA files with, plus the published VA and HUD rules. Everything is subject to lender guidelines and full file review, and none of it is a commitment to lend.

Side-by-Side

What the Disability Exemption Actually Changes

The exemption removes one cost: the VA funding fee. VA’s funding fee page describes the fee as a one-time payment, with a separate chart for cash-out refinances. The same page lists who is exempt. That includes veterans who receive VA compensation for a service-connected disability, those eligible for compensation who receive retirement or active-duty pay instead, and surviving spouses who receive DIC. Active-duty Purple Heart recipients can qualify if they provide evidence before closing.

Here is what the exemption does not do. It does not erase appraisal, title, recording, or lender charges. Those remain on any refinance. Nor does it change the FHA side, because FHA has no matching exemption. An FHA cash-out carries the upfront premium of 1.75% of the base loan, which is usually financed. It also carries an annual premium between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. Because FHA cash-out tops out at 80% LTV, the rule that keeps the annual premium for the full term on loans above 90% LTV does not come into play here. At or below 90%, the annual premium ends after eleven years.

So the trade is clean for a rated veteran. VA can remove the funding fee and carries no monthly mortgage insurance. FHA carries both an upfront and an ongoing premium.

Does the rating percentage matter? What counts is that the rating pays compensation. Confirm the specifics at VA.gov, because pending claims and ratings that arrive after closing are handled differently, and refund treatment is worth a direct question to your lender.

When VA Cash-Out Is the Better Fit

VA is usually the stronger choice when these things line up:

• You hold a Certificate of Eligibility and a compensable service-connected rating, so the funding fee may be waived.
• You want to keep monthly mortgage insurance off the loan. VA has none.
• You need more room than 80% LTV allows. VA sets its cap by reasonable value, and its rules generally permit more leverage than FHA. The exact limit depends on the lender and your entitlement.
• You currently hold a non-VA loan, including an FHA loan carrying a monthly premium. VA’s cash-out page says a cash-out can refinance a non-VA loan into a VA-backed loan. For a rated veteran, that can swap an FHA premium structure for one with no monthly premium.

VA also has some friction worth knowing. A VA appraisal sets the reasonable value. Net tangible benefit rules apply, and the cash-out disclosures are required. VA’s lender briefing on the cash-out rule explains the Type I and Type II definitions. Type I does not exceed the payoff of the loan being refinanced. Type II does. The rule came out of a 2018 law aimed at protecting veterans from predatory refinance offers, so expect more paperwork than a casual “just call a lender” pitch suggests.

VA also pairs credit and income checks with a residual-income test, which looks at what’s left after major obligations. Disability compensation counts as income with an award letter. Lenders often layer their own credit floors on top of VA, and those vary. Using VA also touches your entitlement, so ask how a cash-out affects what you could use later.

One caution: VA does not lend directly. You go through a private lender, and VA’s page warns about misleading refinance offers. A cash-out turns home equity into debt secured by your house. That trade deserves a clear purpose, not just a convenient number.

When FHA Cash-Out Is the Better Fit

FHA earns its place in a few situations.

• VA does not fit the property or the loan. Some homes or situations hit snags in the VA appraisal or underwriting process. FHA has its own property standards and can be a workable second path.
• Entitlement is a concern. If you’d rather not use or reduce VA entitlement on this home, FHA keeps it untouched.
• Your credit profile suits FHA’s structure. Across the wholesale programs Lendmire places FHA files with, the decision-score floor is 580. Ratios start at a 31/43 base and, with documented compensating factors, can reach 40/50 at the top tier. The automated finding governs most files. Some borrowers find FHA’s ratio flexibility easier to work with than a given VA lender’s overlays.
• You’re a veteran without a rating, or the exemption isn’t confirmed. Without the exemption, VA’s funding fee comes back into the comparison. Then the contest narrows, though VA still skips monthly mortgage insurance.

The limits are real, though. HUD Mortgagee Letter 2019-11 cut the FHA cash-out maximum from 85% to 80% of adjusted value. The 80% covers the whole new loan, meaning the payoff of your old mortgage, any financed premium, and any lien that stays on the home. The cash you receive is whatever room remains under that cap, less costs. The home also needs to have been owned and occupied for 12 months before the case number. County loan limits apply, so check your county at HUD’s FHA limit lookup rather than assuming. Disability income counts under FHA with documentation from VA, but FHA and VA each have their own gross-up rules for non-taxable income. Ask your loan officer which applies. For tax questions on disability pay, the IRS is the authority.

A Tie-Breaker: What Are You Paying Off?

Picture a veteran who holds a conventional loan on a home with solid equity, a compensable rating, and a plan to cover a home repair and consolidate a few balances. Now picture a veteran with an existing FHA loan who only wants a lower-cost structure and no cash. Neither cash-out may be the right tool, because an FHA Streamline or a VA rate-reduction loan skips the cash-out altogether. Streamlines are not cash-outs, and each requires its matching existing loan.

Now picture a rated veteran whose home appraises awkwardly under VA’s process but fits FHA’s standards. FHA can win there, accepting the insurance premiums in exchange for a clean path.

The flip point comes down to three questions. Does the VA exemption apply? Does the VA appraisal and entitlement picture work? And how much cash does the plan truly need? If you need less cash than 80% LTV allows, FHA’s cap barely matters, and the comparison turns on insurance cost alone. If you need more, FHA may be out of reach and VA becomes the only route.

Key Terms Defined

Funding fee: A one-time VA charge on most VA-backed loans, which may be waived for veterans with qualifying service-connected disability compensation.

Mortgage insurance premium (MIP): FHA’s insurance charge, made up of an upfront premium and an annual premium.

Certificate of Eligibility (COE): The VA document that confirms your eligibility and shows any funding fee exemption.

Entitlement: The amount of VA guaranty available to you, which a VA loan can use up and later restore.

Adjusted value: The FHA appraisal-based value used to apply the 80% LTV cap. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.

Net tangible benefit: A VA test requiring that a refinance deliver a real, measurable gain to the veteran.

Balanced Verdict

For a veteran with a compensable service-connected rating, an intact entitlement, and a home that appraises cleanly, VA cash-out tends to be the better structure. It skips monthly mortgage insurance, may carry no funding fee, and can reach beyond FHA’s 80% ceiling. For a veteran whose rating is unconfirmed, whose entitlement is committed elsewhere, or whose home snags in VA’s process, FHA cash-out is a legitimate path with a real cost: two layers of mortgage insurance. Neither loan is free money. Both turn equity into debt against your home.

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 broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. VA funding fee and closing costs

2. VA cash-out refinance loan

3. VA’s lender briefing on the cash-out rule

4. HUD Mortgagee Letter 2019-11

5. IRS