The Quick Read: It depends on what the new loan changes for your monthly budget. The move often makes sense when it removes mortgage insurance or improves residual income. It makes less sense when the only gain is a lower rate that the funding fee, closing costs and a longer term cancel out. VA allows the switch, and “cash-out” is only the program name. You do not have to take cash.
Can a Conventional Loan Be Refinanced Into a VA Loan?
Yes. The VA cash-out is the only VA refinance that can pay off a conventional loan. VA’s cash-out loan page says the program lets a borrower take cash from home equity or refinance a non-VA loan into a VA-backed loan. Lendmire’s VA cash-out refinance program works the same way. The new loan replaces the old one as a first lien. It does not sit behind it like a second mortgage.
The streamline, called the IRRRL, does not apply. It refinances an existing VA loan only. A veteran with a conventional mortgage has one VA path: the cash-out.
Do You Have to Take Cash Out?
No. A cash-out refinance under VA rules is any refinance that pays off a non-VA loan, even when the new balance only covers the payoff and the financed funding fee. Many veterans use it just to convert the loan type.
Taking cash is a separate choice. Every dollar of cash is added to the loan balance and secured by the home. The question to ask is whether the cash earns its place in the loan or whether a clean conversion serves you better.
Who Qualifies and What the Home Must Meet
VA lists three conditions, and all three are required:
- A Certificate of Eligibility (COE).
- Credit and income that meet VA’s standards and the lender’s standards.
- Occupancy: you live in the home being refinanced.
The COE decides eligibility, and VA sets the service requirements. Occupancy is firm. Investment properties and vacation homes do not qualify. Active-duty members may use a spouse’s or dependent’s home.
On the underwriting side, residual income is the controlling test. That is the money left each month after taxes, debts and living costs are covered. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the usual minimum.
Pricing and available terms vary by lender, borrower profile, property type, and full underwriting review. VA itself sets no minimum score, so lenders set their own. The wholesale programs Lendmire places VA loans with start at a 580 decision score. Some lenders set higher floors or ask for an updated appraisal. VA’s loan types page confirms lenders may add credit and appraisal standards. All of this is subject to lender guidelines and full file review.
What Does the New Loan Have to Accomplish?
The new loan must pass the net tangible benefit test. 38 CFR § 36.4306 requires that a refinance be in the borrower’s financial interest. The lender must run the test and give you a comparison of the old and new loans.
The eCFR Part 36 text lists the qualifying benefits. Meeting at least one is the standard. They include:
- Eliminating monthly mortgage insurance.
- A shorter loan term.
- A lower interest rate.
- A lower payment.
- Higher monthly residual income.
- Refinancing an interim construction loan.
- A new loan at or below 90% of the home’s reasonable value.
For a conventional borrower, the cleanest benefit is usually the first one. Conventional loans with under 20% down carry monthly mortgage insurance. VA loans carry none. That swap is a common reason this refinance pencils out.
How Much Can the New Loan Reach?
The VA cash-out reaches 100% of the appraised value, and that includes the financed funding fee. The cap sits in the same 38 CFR § 36.4306 rule. An older 90% limit was removed years ago, so a source quoting 90% is out of date.
The appraisal sets the ceiling, and the fee cannot push past it. Under the Federal Register rule on funding fee financing, a veteran pays any overage in cash. A lender may also set its own cap below 100%.
What Does It Cost?
The funding fee is the main VA-specific cost. It can be financed into the loan, and it is waived for veterans receiving compensation for a service-connected disability and the other exempt groups.
| Use | Funding fee |
|---|---|
| Cash-out, first use | 2.15% |
| Cash-out, after first use | 3.3% |
| IRRRL (VA to VA only) | 0.5% |
The reduced fee tiers tied to down payments do not apply to refinances. “Subsequent use” counts any earlier VA loan, even on a different home.
Closing costs come on top. Appraisal, title and lender charges apply as on any refinance. VA warns that these can add up to thousands of dollars. Your Loan Estimate shows them, and the Closing Disclosure confirms them.
Financing the fee raises your balance. That matters for the decision, because a bigger loan means more interest over time.
The Decision: Good Fit, Think Twice, Probably Not
| Your situation | Read |
|---|---|
| Paying monthly mortgage insurance on the conventional loan | Good fit |
| Disability-exempt from the funding fee | Good fit |
| Higher monthly residual income is the goal | Good fit |
| 20%+ equity, no mortgage insurance now | Think twice |
| Current loan has a long-standing low payment | Think twice |
| Planning to sell soon | Probably not |
| Only gain is a slightly lower rate | Probably not |
The exemption row deserves attention. Over half of recent VA borrowers were exempt from the fee, according to VA News. For an exempt veteran, the largest VA-specific cost drops away.
A Worked Scenario
Picture a veteran who bought with 5% down on a conventional loan. Monthly mortgage insurance still sits in the payment. Home values have risen, and the loan is now well under 80% of the appraised value. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
A VA cash-out could pay off the old loan and drop the insurance entirely. The funding fee gets financed, so the balance rises by that percentage. The question is whether the insurance saved each month, over the time the veteran expects to stay, outweighs the fee and closing costs. If the veteran is exempt from the fee, the answer tilts strongly toward yes.
Now flip it. A veteran with 25% equity has no mortgage insurance. The VA loan removes nothing. The balance goes up by the fee, the term resets, and the gain is thin. That file is a “think twice.”
What Carries Over From VA-to-VA Rules?
Less than people assume. Seasoning, the later of 210 days from the first payment and the sixth payment, attaches to refinancing an existing VA loan. VA’s cash-out guide ties the seasoning and recoupment certifications to VA-to-VA refinances. A conventional payoff generally does not face that test. Lenders can still impose their own payment-history rules, so treat that as a lender overlay, not a VA rule.
The net tangible benefit test still applies either way. That is the gate for the conventional borrower.
A file with a recent delinquency, forbearance or modification needs a direct conversation with the lender, because overlays vary.
Risks and Downsides
- A bigger balance. The financed fee and any cash raise what you owe. The CFPB notes cash-out refinances typically carry higher balances and payments, which can raise foreclosure risk.
- A term reset. Starting a new loan restarts amortization. Total interest paid can rise even when the monthly payment falls.
- Debt consolidation risk. Moving unsecured debt into the mortgage puts the home behind it. CFPB research says the benefit depends on circumstances and the home is at risk.
- Appraisal shortfall. A low value shrinks the ceiling and can force cash at closing.
- Entitlement use. A new VA guaranty uses entitlement. Ask a loan officer how it affects a future purchase.
Alternatives to Weigh
Before committing, compare four paths: keep the current loan, a conventional rate-and-term refinance, a home equity loan or HELOC, and asking the conventional servicer to remove mortgage insurance once equity allows. Each fits a different goal.
Key Terms Defined
Certificate of Eligibility (COE): VA’s document confirming you meet service requirements.
Net tangible benefit: The test showing the refinance improves your financial position.
Residual income: The money left each month after major obligations and living costs.
Funding fee: A one-time VA charge, waived for exempt veterans.
Entitlement: The amount of VA guaranty available to you.
Reasonable value: The value VA determines from the appraisal.
Steps in the Process
1. Get your COE through a lender, VA.gov or by mail.
2. Confirm the home is your primary residence.
3. Gather income, credit and mortgage statements for the file.
4. Ask for the net tangible benefit comparison between the old and new loan.
5. Order the appraisal and review the value against the loan you want.
6. Compare the Loan Estimate to the Closing Disclosure before signing.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Frequently Asked Questions
Do I need a prior VA loan to do this?
No. A first-time VA user with a conventional mortgage can use the cash-out program, provided the COE, occupancy, credit and income conditions are met. First use carries the lower cash-out funding fee tier.
Is a VA cash-out the same as a home equity loan?
No. It is a new first mortgage that pays off the old one. A home equity loan or HELOC sits behind your existing loan as a second lien.
Can I use a VA streamline on my conventional loan?
Not directly. The IRRRL requires an existing VA loan. A conventional loan can only move into VA through the cash-out program.
Does the funding fee apply to everyone?
No. Veterans receiving compensation for a service-connected disability and certain surviving spouses are exempt. A veteran with a pending claim at closing may be entitled to a refund if compensation is later awarded.
Can I use this on a rental or second home?
No. VA loans are for your own home, so investment properties and vacation homes do not qualify.
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 on the home you live in. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
To see how a VA cash-out would look on your primary residence, 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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References
1. VA.gov: Cash-out refinance loan
4. eCFR Part 36
5. Federal Register interim final rule on funding fee financing
6. VA News: Funding fee, who pays and who is exempt
7. CFPB
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: Can a Veteran Get a VA Cash-Out on a Rural Home With Acreage? · Conventional vs VA Cash-Out for a Veteran Consolidating Debt · Can a Veteran With a VA Loan Finance All VA Cash-Out Closing Costs?
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.