The Quick Read: The type is set by one comparison: the new loan amount, financed funding fee included, against the payoff of the loan being replaced. If the new loan stays at or under the payoff, it is a Type 1, and no cash comes out. If it goes over the payoff, it is a Type 2, and the extra is cash to the borrower. Both types get full underwriting: credit, residual income, an appraisal and a net tangible benefit test. The type changes the goal of the file, not how thorough the review is.
How Does a Lender Decide Which Type a File Is?
The file is a Type 1 when the new loan does not exceed the payoff. It is a Type 2 when it does. The lender builds the new loan amount first, from the payoff of the current mortgage, any other liens being cleared, the financed VA funding fee, and any cash to the borrower.
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.
Here is a plain example, in percentages only. A home is appraised at some value, and the current loan is 60% of that value. A borrower only wants to swap a conventional loan for a VA loan and rolls the funding fee in. The new loan then sits slightly above the 60% payoff, because the financed fee is added on top. In that case the file is technically a Type 2 even though no cash is handed over. Files get re-typed this way. The fix is to count the fee in your first draft of the numbers, not after the Loan Estimate comes back.
The VA describes the product as replacing your current loan with a new one on different terms, either to take cash from equity or to move a non-VA loan into a VA-backed loan, as laid out on the VA’s cash-out refinance page. You apply through a private lender, not through the VA, and you need a certificate of eligibility (COE).
For the program overview, see Lendmire’s VA cash-out refinance program page.
What Is the Underwriting Sequence, Step by Step?
Underwriting runs in a fixed order, and the type is decided early because it shapes everything after it. Lenders in the wholesale programs Lendmire places VA files with work through the same steps on both types.
1. Eligibility and COE. The lender pulls or confirms the certificate of eligibility. Eligibility belongs to the VA, not the lender. The loan being replaced can be a VA loan or a non-VA loan.
2. Classification. The lender totals the payoff, other liens, financed funding fee and any cash out. That total against the payoff gives Type 1 or Type 2.
3. Appraisal and the value ceiling. The VA cash-out reaches up to 100% of the appraised value, and the financed fee counts inside that ceiling. The appraisal sets how much equity is reachable. It is the single input a borrower cannot negotiate.
4. Credit review. The wholesale programs start at a 580 decision score. That is a floor, not a promise. Some lenders set a higher one.
5. Residual income and debt ratio. Residual income is the controlling test. It is what is left each month after the major obligations and living costs by region and family size. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table.
6. Net tangible benefit. The new loan has to meet at least one of VA’s eight listed benefits. Each has to be shown in the file.
7. Seasoning, if the old loan is VA-backed. The loan being replaced has to be seasoned: the later of 210 days from the first payment and the sixth payment.
8. Loan comparison disclosure. The borrower sees the old and new loans side by side, including payoff amounts, with the Loan Estimate and Closing Disclosure that apply to any consumer mortgage.
Where the type matters most is steps 2, 3 and 6. Step 2 sets the type. Step 3 limits how big a Type 2 can be. Step 6 is where the borrower’s actual goal gets tested against the rules.
How Do Type 1 and Type 2 Compare?
| Factor | Type 1 | Type 2 |
|---|---|---|
| New loan vs. payoff | At or under the payoff | Over the payoff |
| Cash to borrower | None | Yes |
| Full underwriting | Yes | Yes |
| Appraisal | Required | Required |
| Seasoning (VA-to-VA) | Yes | Yes |
The two types are defined this way in VA Circular 26-19-05, which also names the three refinance categories: the IRRRL, Type 1 and Type 2. The circular also says a VA refinance cannot be guaranteed when the loan exceeds 100% of the property’s reasonable value, and a financed funding fee cannot push the loan past that line.
The table is short on purpose. The fee and the underwriting tests are the same on both. What differs is what the borrower walks away with.
What Is the Net Tangible Benefit Test?
The net tangible benefit test asks one question: is the new loan in the borrower’s financial interest? The lender has to show at least one of VA’s listed benefits, and the borrower gets a comparison of the old and new loans.
The listed benefits in the VA’s loan guaranty regulation include:
- eliminating monthly mortgage insurance,
- a shorter loan term,
- a lower interest rate,
- a lower payment,
- higher monthly residual income,
- refinancing an interim construction, alteration or repair loan.
The regulation lists eight in total. Which one fits depends on the file. A Type 2 does not have to lower the payment. It only has to meet one benefit, and a residual-income gain or an equity position can be that benefit. A Type 1 that swaps a loan with monthly mortgage insurance into a VA loan, which carries none, often meets the test on that fact alone.
The half-percent rate-reduction test and the fee-recoupment test are IRRRL rules. In the wholesale programs Lendmire works with, neither applies to the VA cash-out. If a checklist you are handed mentions them, ask which loan it was written for.
Where Does the General Rule Break?
A Type 1 with no cash. “Cash-out” does not always mean cash. Moving a conventional or FHA loan into a VA loan, with nothing taken out, is commonly a Type 1. It still needs full underwriting, an appraisal and a net tangible benefit.
The financed fee tips the type. Covered above, but it is the most common surprise. A borrower who wants “no cash” can end up as a Type 2 by a thin margin once the fee is financed.
A low appraisal. The 100% ceiling is a ceiling, not a target. If the appraisal comes in under what the borrower expected, a Type 2 shrinks first. A Type 1 can survive a low value only if the new loan still sits at or under the payoff and under 100% of value.
A recent VA loan. Seasoning applies when the old loan is VA-backed. A VA loan that is too new has to wait. A non-VA loan being replaced does not carry that test.
Entitlement. When a VA loan is refinanced, the refinanced portion is treated as using the entitlement from the old loan. Any amount above that needs additional entitlement, per the same regulation. Full entitlement, with no VA loan limit, is the cleanest case. With remaining entitlement, speak with a loan officer about the specifics.
Occupancy. The cash-out is for a home the borrower lives in. Active-duty cases involving a spouse or dependent are handled case by case by the lender.
Lender overlays. The VA sets the outer limit. A lender can set tighter ones, such as a higher credit floor. That is why two lenders can look at the same file and answer differently. A broker that shops several wholesale lenders can match the file to the one whose overlays fit.
How Does the Choice Look in Practice?
The choice follows the goal, not the other way around. Pick the type by asking what the borrower needs out of the loan.
| Borrower goal | Likely type | What to watch |
|---|---|---|
| Move from a conventional or FHA loan into VA, no cash | Type 1 | Financed fee can tip it to Type 2 |
| Pay off other debt with equity | Type 2 | Residual income after the new payment |
| Fund a repair or remodel | Type 2 | Appraisal drives how much is reachable |
| Drop monthly mortgage insurance | Type 1 | Show the benefit in the comparison |
| Take equity while the old loan is VA-backed | Type 2 | Seasoning on the old loan |
Run the file both ways before committing. Say a homeowner sits at a moderate balance against the appraised value and wants a small amount of cash. The Type 2 version adds that cash to the loan, and the funding fee, being a percentage of the loan, grows with it. The payment may rise, and the lender weighs that through residual income. The Type 1 version holds the balance at the payoff and gives up the cash. Which is better depends on the file. A homeowner with plenty of residual income has room for the Type 2. One with a thin margin may do better with the Type 1, or a smaller cash amount.
The funding fee is 2.15% on a first-use cash-out and 3.3% on later use, and it is waived for veterans receiving compensation for a service-connected disability and the other exempt groups. The fee schedule is posted in VA Circular 26-23-06, Exhibit B. For comparison, the IRRRL carries a 0.5% fee. The reduced rates tied to a larger down payment do not apply to refinances.
For a side-by-side with another loan type, see Lendmire’s piece VA Cash-Out Refinance vs. Conventional Cash-Out Under VA Type 1 and Type 2 Refinance Rules.
What Gets Files Stuck?
Files tend to stall in five places.
- Re-typing after the Loan Estimate. The fee or a payoff figure moves the total. Fix: build the loan amount with the fee in from the start.
- A low appraisal. Fix: expect a Type 2 to shrink first, and have a smaller cash amount in mind.
- Seasoning miscounted. Fix: confirm the first payment date and the payment count on the old loan.
- Thin residual income. Fix: pay down or pay off debts the new loan can clear, since that raises residual income.
- A missing COE. Fix: get it before the file goes in.
Treat “no cost” or “guaranteed savings” language with suspicion. The costs do not disappear. They get built into the balance or the pricing.
Key Terms Defined
Certificate of Eligibility (COE): The VA document that confirms a borrower qualifies for a VA loan.
Residual income: The money left each month after major obligations and living costs, measured against a VA table.
Net tangible benefit: A test showing the new loan is in the borrower’s financial interest, met by one of VA’s eight listed benefits.
Seasoning: The required age of the loan being replaced, the later of 210 days from the first payment and the sixth payment, for a VA-to-VA refinance.
Funding fee: A one-time VA charge, financeable inside the loan, and waived for exempt borrowers.
Frequently Asked Questions
Does a Type 1 VA cash-out mean I get no cash at all?
Yes, in the sense that matters for the file. A Type 1 keeps the new loan at or under the payoff, so nothing goes to the borrower. The benefit is the loan structure, such as moving from a non-VA loan into a VA loan or removing monthly mortgage insurance.
Is a Type 2 harder to qualify for than a Type 1?
Not by a different set of tests, but the numbers can be tighter. Both get full underwriting. A Type 2 has a bigger balance, so the payment and residual income have a harder job. The appraisal also limits how much cash is reachable.
Can I refinance a conventional or FHA loan into a VA cash-out?
Yes. A VA cash-out lets a private lender refinance any loan type into a VA loan. The seasoning test applies only when the old loan is VA-backed. The net tangible benefit test applies either way.
How much of my home’s value can I reach?
Up to 100% of the appraised value, with the financed funding fee counted inside that ceiling. Some lenders set a tighter limit, so the amount you can actually reach depends on the lender and the appraisal.
What credit score does a VA cash-out need?
The VA sets no minimum score, so any floor comes from the lender. The wholesale programs Lendmire places VA files with start at a 580 decision score, and some lenders set a higher one. Residual income is the controlling test either way. All of this is subject to lender guidelines and full file review.
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. 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.
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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.gov — Cash-out refinance loan
4. VBA Circular 26-23-06, Exhibit B (loan fees)
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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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.