The Quick Read: VA cash-out is usually the better fit when you want to pull out a lot of equity from the home you live in. A service-connected rating can waive the VA funding fee, and VA financing carries no monthly mortgage insurance. Conventional can still win, and the cases are narrower than most veteran-focused pages admit.
Here is the honest split. VA cash-out is built for a veteran who lives in the home, wants to borrow a large share of its value, and may be paying mortgage insurance on a conventional or FHA loan today. Conventional cash-out is built for a borrower who keeps plenty of equity in the house, wants to save VA entitlement, or is financing something other than a primary residence. Neither program is cheaper for every household. The rating tilts the VA side, and it does so in a few specific places.
Side-by-Side
Subject to lender guidelines and full file review, this is how the two products line up for a homeowner with a disability rating.
| Factor | VA Cash-Out | Conventional Cash-Out |
|---|---|---|
| Leverage | Up to 100% of appraised value, fee included | Set well below full value |
| Credit floor | 580 decision score on wholesale programs | Usually higher; varies by lender |
| Mortgage insurance | None | Depends on equity left in the home |
| Upfront fee | Funding fee; waived with rating compensation | No funding fee; other costs apply |
| Occupancy | Primary residence | Primary, second home, or rental at lower leverage |
| Income test | Residual income controls; 41% DTI is a guideline | Debt-to-income driven |
| Documentation | COE, award letter, matching deposits | Standard income and asset documents |
| Entitlement | Uses VA entitlement | Untouched |
Two things stand out. VA gives you more room on leverage and credit. Conventional gives you a cleaner break from the VA benefit.
What Your Rating Actually Changes
Your rating changes the funding fee, and it helps with how the lender reads your income. It does not change the lender’s pricing, and it does not loosen the property rules.
The funding fee. VA charges a one-time funding fee on most loans. VA explains that the fee offsets the cost to taxpayers because the program has no down payment requirement and no monthly mortgage insurance. It applies to refinances unless you meet an exemption. Receiving VA compensation for a service-connected disability is one of them.
For a non-exempt veteran, the cash-out fee is 2.15% on first use and 3.3% on later use. It can be financed into the loan, which raises the balance. An exempt veteran skips that entirely.
Does the exemption depend on how high your rating is? VA ties it to receiving compensation, not to a percentage. A lower rating that pays compensation is treated like a higher one for this purpose. Confirm your fee status on your certificate of eligibility (COE), the VA document that lists your service eligibility and whether you are exempt.
Income treatment. Disability compensation is typically tax-free. The VA Lenders Handbook, Chapter 4 lets lenders “gross up” non-taxable income. That means counting it at a higher figure to reflect that you keep all of it. The lender has to verify the income is tax-free and likely to continue first.
Here is the catch, and it matters. The gross-up helps your debt-to-income (DTI) ratio, which compares monthly debts to monthly income. The residual income test, which looks at what’s left after all obligations, uses your actual income. On a VA loan, residual income is the controlling test. So grossing up smooths the DTI number without changing the cash-flow test.
Conventional underwriting also gives credit for tax-free income, but the bump is generally smaller, and the details vary by lender and automated system.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
What the rating does not change. A higher percentage does not unlock extra loan terms, a bigger loan, or a different credit floor. It does not make the home eligible if it isn’t your primary residence. And it does not exempt you from the appraisal or the net tangible benefit test.
When VA Cash-Out Is the Better Fit
VA is the stronger choice in a handful of situations, and a rated veteran meets several of them at once. If you are exempt from the funding fee, the program’s one real upfront cost drops away. Meanwhile, the features that make VA attractive stay in place.
You want to reach a high share of your home’s value. The VA’s cash-out circular sets the ceiling: VA will not guarantee a refinance when the loan, including any financed funding fee, exceeds the property’s reasonable value. So VA tops out at 100% of appraised value. Across the wholesale programs Lendmire places VA loans with, that 100% ceiling is available, though a given lender’s overlay can sit lower. Conventional cash-out stops well short of full value on a primary residence.
Picture a veteran with a rating, a home worth far more than the balance, and a need for a large chunk of equity. The home might need a roof, a new addition, or a consolidation of high-cost debt. Conventional may cap the cash well below what that veteran needs. VA may reach it.
You’re paying mortgage insurance now. VA carries no mortgage insurance of any kind. If your current conventional or FHA loan has it, a VA cash-out can drop it. VA’s own net tangible benefit form lists eliminating monthly mortgage insurance as one qualifying benefit.
Your credit has some bruises. VA sets no minimum credit score. The wholesale programs Lendmire works with start at a 580 decision score. Conventional lenders typically ask for more. A recent rough patch can close the conventional door while VA stays open.
Your DTI runs high. The 41% DTI figure on a VA loan is a guideline, not a cap. A higher ratio needs residual income well above the table, but it can still be reviewed. Many conventional programs treat DTI as a harder line.
You’re refinancing a non-VA loan. A VA cash-out can pay off any loan type, including conventional and FHA. You do not need an existing VA loan to use it. That surprises a lot of people.
A word on a trap. Be careful with any solicitation that leads with cash back and a lower monthly figure. The CFPB took enforcement action against a VA cash-out lender after its comparisons showed the new loan’s payment without taxes and insurance while the old loan’s payment included them. That made the new loan look cheaper than it was. The fix is simple: compare total costs on the Loan Estimate, not one number in an ad.
When Conventional Is the Better Fit
Conventional wins less often for rated veterans, but it wins in real situations. A fair comparison names them.
You don’t need much cash. If you are borrowing well under the conventional limit and keeping a healthy equity cushion, the mortgage insurance advantage shrinks. Many conventional cash-out loans at lower leverage carry none. When the gap in cost narrows, other factors can decide it.
You want to preserve your VA entitlement. Entitlement is the amount of your VA benefit the government guarantees. A VA cash-out uses some of it. Check your COE for what remains. If you plan to buy another home with VA financing soon, a conventional refinance leaves the benefit untouched. A veteran who expects to buy a second primary residence in a new city should think hard here.
The property isn’t your primary residence. VA requires you to occupy the home and certify it. If you want cash out of a second home or a rental, VA is off the table. Occupancy decides the leverage, and conventional is the product that covers those properties, usually at a lower leverage ceiling.
You’re selling soon. A financed funding fee on a non-exempt loan adds to the balance. Exempt veterans avoid that, but a cash-out still raises the balance. If you expect to sell in the near term, any refinance may not earn back its costs. VA also asks for a net tangible benefit, and for some VA-to-VA files a recoupment test on the fee. A short horizon can make the numbers hard to justify on either program.
You have strong equity and strong credit. A borrower with ample equity, a high score, and low debts may find conventional straightforward. In that case, the VA paperwork may add little.
(One honest aside: the funding fee exemption is the headline, but it only applies to a fee you’d otherwise pay. If you aren’t borrowing near the ceiling, the exemption saves you less than the pages promoting it suggest.)
The Steps and Tests Both Paths Share
Both products require an appraisal and a full file review. Beyond that, VA adds a few steps worth knowing.
1. Certificate of eligibility. Your COE shows service eligibility and fee status. If your rating is recent, make sure the exemption shows up.
2. Documents. A typical VA file includes the COE, your VA award letter, bank deposits that match the award, and mortgage statements. The lender confirms the income is tax-free and continuing.
3. VA appraisal. The reasonable value VA assigns drives the leverage math.
4. Net tangible benefit. VA’s cash-out circular applies this test to all cash-out refinances. The loan has to leave you better off in a defined way, such as dropping mortgage insurance or moving from an adjustable to a fixed structure.
5. Seasoning. If you’re refinancing a VA loan, waiting-period rules apply before you can cash out.
6. Underwriting. The lender weighs residual income, DTI, and credit together.
Note that the streamlined VA refinance, the IRRRL, is for VA-to-VA loans and does not provide cash back. It’s a different tool for a different job.
Special Situations
Rating still pending. If your rating hasn’t been awarded, the lender generally has to treat the loan as non-exempt unless documentation clearly shows otherwise. If VA later awards the rating retroactively, a refund may be possible, depending on the effective date relative to your closing. Confirm the details with VA.
Other exempt groups. Surviving spouses receiving Dependency and Indemnity Compensation, active-duty Purple Heart recipients, and some others are also exempt. The VA’s funding fee page lists them.
Rating reviews. A rating can be reviewed, and a protected rating is more stable than one subject to reexamination. Lenders look at whether the income is likely to continue. Share any scheduled review with your loan officer early, so it doesn’t surprise anyone mid-file.
Home equity loan or line of credit. If you like your current loan, a second lien may reach the cash without replacing it. It leaves the first loan alone, which can matter if your existing loan is a good one.
Key Terms Defined
Funding fee: A one-time VA charge on most VA loans, financeable into the loan balance and waived for veterans receiving compensation for a service-connected disability.
Certificate of eligibility (COE): The VA document that confirms your service eligibility and shows whether you are exempt from the funding fee.
Residual income: The money left each month after major obligations and living costs, and the controlling test on a VA loan.
Entitlement: The portion of your VA benefit that VA guarantees on a loan. A cash-out uses some of it.
Net tangible benefit: VA’s requirement that a cash-out refinance leave the borrower measurably better off.
Gross-up: A lender’s adjustment that counts tax-free income at a higher figure for the debt-to-income calculation only.
The Verdict
For most veterans with a service-connected rating who live in the home and want substantial equity, VA cash-out is the stronger starting point. The fee waiver, the lack of mortgage insurance, the 100% ceiling, and the flexible credit floor all point the same direction. For veterans who need modest cash, want to protect entitlement, or are financing a non-primary property, conventional deserves a real look.
Run both against your actual numbers on a Loan Estimate, and compare total costs rather than a single payment figure. The VA cash-out refinance program page explains the mechanics step by 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.
Frequently Asked Questions
Does the funding fee exemption apply to a cash-out refinance?
Yes. VA says the fee applies to refinances unless you meet an exemption, and receiving compensation for a service-connected disability is one. Confirm your status on your COE before the Loan Estimate arrives.
Does a higher disability rating get me better loan terms?
No. The exemption turns on receiving compensation, not on the percentage. A higher rating doesn’t change the credit floor, the leverage ceiling, or the appraisal. It may matter for other benefits, but not for loan terms here.
Does disability income count as qualifying income?
Yes, if it is documented and likely to continue. Lenders typically check your award letter and matching bank deposits. The gross-up helps the DTI ratio, but residual income uses your actual figures.
Does a VA cash-out use up my entitlement?
It uses some. How much remains depends on your loan and your COE, so check the certificate before planning a later VA purchase. A conventional refinance leaves entitlement untouched.
Can I refinance a conventional loan into a VA cash-out?
Yes. Your home must be your primary residence, and the loan must pass the net tangible benefit test, subject to lender guidelines and full file review.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. VA — Funding fee and closing costs
2. VA Lenders Handbook (VA Pamphlet 26-7), Chapter 4: Credit Underwriting
3. VA Circular 26-19-05 (Cash-Out Refinances)
4. CFPB — enforcement action on VA cash-out refinance marketing
This article is part of Lendmire’s VA Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: How to Get a VA Cash-Out on an Inherited Home After Probate · VA IRRRL and VA Cash-Out Requirements Side by Side · VA Cash-Out Funding Fee Exemption Rules for a Pending Disability Rating
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.