The Quick Read: A lender runs every VA cash-out refinance through the same full underwriting, then sorts it into one of two types by comparing the new loan amount, VA funding fee included, to the payoff of the loan being replaced. If the new loan is the same or smaller, it is Type I. If it is larger, it is Type II, and that is where you actually take equity out. Both types need a certificate of eligibility, an appraisal, credit and income review, and a “net tangible benefit.”
Key Takeaways
- The type depends on one comparison: the new loan, funding fee included, against the payoff.
- Type I can still be a “cash-out” loan on paper even when no cash comes back. Type II is the one that puts money in your hands.
- Both types reach up to 100% of the appraised value, with the financed fee counted inside that cap. Type II is simply the case where the new loan lands above the payoff, so the equity you take out sits within that same cap.
- Residual income, the money left each month after your obligations, is the controlling test. The 41% debt-to-income figure is a guideline, not a cap.
- Seasoning and the benefit test apply to both types. The half-percent rate-drop and fee-recoupment tests belong to the streamline (IRRRL) and are not part of cash-out underwriting.
What Is a VA Cash-Out Refinance?
A VA cash-out refinance replaces your current mortgage with a new VA-backed loan on different terms. VA explains that it can pull cash from your equity. It can also move a non-VA loan, such as an FHA, USDA or conventional mortgage, into a VA-backed loan.
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.
Two eligibility pieces come first. You need a certificate of eligibility (COE), which is VA’s proof that you have earned the benefit. And you must live in the home you are refinancing. You get the loan from a private lender, not from VA directly. The lender orders the appraisal.
Lendmire’s VA cash-out refinance program page covers the program overview. This article covers what happens inside the file.
Here is the borrower-friendly summary of the envelope. Across the wholesale programs Lendmire places VA files with, financing reaches 100% of the appraised value, including the financed funding fee. There is no mortgage insurance and no VA loan limit when you have full entitlement. VA itself sets no minimum credit score. The wholesale programs start at a 580 decision score, and each lender’s guidelines and a full file review decide the rest.
How Does the Underwriting Sequence Work, Step by Step?
The sequence runs eligibility, appraisal, classification, benefit test, credit and income, then decision. Each step can change the next one, so a file is not truly “set” until the appraisal and payoff are final.
1. Eligibility and COE. The lender pulls or reviews your certificate of eligibility (COE), which VA’s decision on your eligibility rests on. Unlike a streamline, a cash-out does not require that your current loan be a VA loan. VA’s benefits page confirms that cash-out loans require satisfactory credit, enough income for the expected monthly obligations, and a valid COE.
2. Appraisal. The lender orders a full VA appraisal. This is the number that caps everything. The new loan, funding fee included, can reach 100% of the appraised value and no further. A lower appraisal shrinks the equity you can reach, sometimes enough to change the whole plan.
3. Payoff and classification. The lender totals what must be paid off: your current mortgage balance, any other liens being cleared, and the closing items that go with the payoff. It then adds the financed funding fee to the proposed new loan and compares the two. That comparison sets Type I or Type II.
4. Net tangible benefit. The lender documents which of VA’s listed benefits the loan delivers. More on this below.
5. Credit and income review. The underwriter reviews your credit history, employment and income, and your debts. Residual income drives this step.
6. Seasoning check, if the loan being paid off is VA-backed. The underwriter confirms enough time and payments have passed on the existing VA loan.
7. Final decision and disclosures. The lender issues conditions, reviews them, and, if the file clears, schedules closing. Because this is a consumer mortgage, you receive a Loan Estimate and a Closing Disclosure along the way.
How Is a File Classified as Type I or Type II?
The classification test is simple arithmetic: new loan amount, funding fee included, versus the payoff. VA’s Lenders Handbook and Circular 26-19-05 define the Type I and Type II classifications this way.
- Type I: the new loan does not exceed the payoff.
- Type II: the new loan exceeds the payoff.
Picture a home appraised at 100 units of value with a payoff at 70% of that value. Say your plan is a new loan at 72% of value, funding fee included. That is Type II, because the loan is bigger than the payoff. The 2-point gap is the cash you take out. If the new loan came in at 70% or less, it would be Type I.
Type I is not the same as an IRRRL. The handbook notes that a Type I can pay off a loan that is VA-backed or non-VA. It uses full underwriting and a new appraisal. A move from FHA to VA with no cash back still runs as a cash-out, because the streamline only exists for existing VA loans.
What can flip a file from Type I to Type II mid-process? Several things:
- A payoff statement that comes in lower than first estimated.
- Closing costs you decide to roll into the loan instead of paying in cash.
- A second lien you decide to pay off.
- A change in the funding fee, such as proof that you are exempt.
- A lower appraisal that forces the loan down, or a higher one that opens more room.
Classification is the last thing to lock, not the first.
Type I vs. Type II at a Glance
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or below the payoff | Above the payoff |
| Cash to the borrower | Little or none | Yes, from equity |
| Net tangible benefit | Required | Required |
Notice what is not in that table. The half-percent rate reduction and the fee-recoupment test are streamline (IRRRL) tests. Across the programs Lendmire places VA files with, they do not apply to the VA cash-out. If a lender or website tells you otherwise, ask which loan type they mean.
What Is the Net Tangible Benefit Test?
The net tangible benefit (NTB) is VA’s way of asking, “Does this refinance leave the veteran better off?” The lender must show the loan meets at least one of eight benefits VA lists. VA’s lender conference materials walk through them. The lender also gives you a loan comparison that shows the effect on your payment and your equity.
The benefits are practical, such as a lower payment, a shorter term, a move from an adjustable to a fixed loan, removal of monthly mortgage insurance, or a loan-to-value ratio low enough to qualify. Refinancing an interim construction loan into permanent financing is also on the list. A single listed benefit satisfies the test.
Both types need a NTB. A common mistake is thinking a Type II is exempt because the point is to take cash. It is not. And a Type II does not have to lower your payment either. It just has to meet one listed benefit.
For example, a borrower who moves from an FHA loan with monthly mortgage insurance into a VA loan with none often meets the test through the insurance removal alone. A borrower who adds a large balance at a longer term may need a different benefit, or may find the file does not fit.
How Does Residual Income Control the Decision?
Residual income is what is left from your monthly income after taxes, debts and set living costs for your household size and region. VA’s tables set a target. If you clear it, the underwriter has a strong reason to approve the file.
Debt-to-income (DTI) is the percentage of your gross income that goes to debts. The 41% figure is a guideline, not a hard cap. A ratio above it is not an automatic denial, but the file needs residual income well above the table to compensate. A cash-out increases your loan balance and often your monthly obligation, which is why this test sits at the center of the file.
Credit review is the other half. VA sets no minimum score, but the wholesale programs Lendmire works with start at a 580 decision score. Some lenders set a higher floor, especially for larger cash-out requests. Expect the underwriter to look at recent late payments, collections and how you have handled housing payments.
Typical documents the underwriter asks for include:
- Pay stubs and tax documents, or the equivalent for self-employed borrowers.
- The COE.
- A current mortgage statement and payoff request.
- Homeowners insurance details.
- Bank statements showing where funds come from.
What Is Seasoning, and When Does It Apply?
Seasoning is the required waiting period before you can refinance a loan. When the loan being replaced is VA-backed, VA’s rule is the later of 210 days from the first payment and the sixth payment. The handbook’s 210-day marker is the one most borrowers hit first.
Paying off a non-VA loan is different. VA’s matrix treats seasoning as a VA-to-VA rule. If you are moving an FHA, USDA or conventional loan into VA, the seasoning question usually shifts to the rules of the loan you are leaving, and to any lender overlay. Ask your loan officer to confirm which applies to your file.
Where the General Rules Break
A lower appraisal. A low value cuts the 100% cap. A Type II plan can shrink to a Type I, or to no refinance at all. Some lenders allow a reconsideration of value, but the lender decides.
Lender overlays. Many lenders cap cash-out below VA’s full allowance. Those are lender rules, not VA rules. A borrower turned down by one lender can sometimes fit another’s guidelines, which is the reason to compare programs. The best program for your situation depends on your equity, credit and documentation.
| Layer | What it controls | Example |
|---|---|---|
| VA rule | The program’s outer limits | 100% of value cap, NTB required |
| Wholesale program | How a lender applies the rules | A 580 decision-score start |
| Lender overlay | Extra caution on top | A lower leverage ceiling, a higher score |
Occupancy. This program is built for the home you live in. If you are weighing a second home or rental, occupancy decides the leverage, so raise it with your loan officer early.
State law. Some states set their own limits on cash-out against a primary home. Texas homestead rules are one example. Ask your loan officer how your state’s rules interact with the loan.
Construction loans. Refinancing an interim construction loan into permanent financing can serve as a listed benefit.
Entitlement. If you have used some of your benefit before, how much remains can affect the loan. Speak with a loan officer about your entitlement; do not guess from a county figure.
What Does the Funding Fee Do to the Numbers?
The funding fee is a one-time VA charge financed into the loan. It is waived for veterans receiving compensation for a service-connected disability and other exempt groups. VA’s fee page shows the cash-out schedule: 2.15% for first use and 3.3% for subsequent use. These refinance fees do not shrink with more equity. The streamline IRRRL fee is lower, at 0.5%.
Older articles sometimes show higher numbers from a prior schedule. Check the current VA page.
Because the fee is financed, it counts twice: in the payoff comparison and in the 100% cap. On a Type II file, a 3.3% fee on the new loan eats into the equity you can take out. Exempt borrowers keep that room.
What Makes a File Stall or Fail?
- Residual income falls short after the new, larger balance is counted.
- The appraisal comes in low, and the numbers no longer fit.
- No listed benefit applies, so the NTB cannot be documented.
- Seasoning is not met on a VA loan being paid off.
- Credit events appear, such as recent late payments or collections.
- Occupancy is unclear, so the home does not read as your primary residence.
- Payoff changes shift the file between Type I and Type II after documents were prepared.
Most of these can be spotted early. Gather your COE, mortgage statement, income documents and insurance details before you apply.
How Do You Choose Between Type I and Type II in Practice?
Start with your goal, not the label.
- If you want to move out of a non-VA loan, drop monthly mortgage insurance, or restructure without taking cash, you are likely heading toward Type I.
- If you want to pay off high-balance debts, fund repairs, or pull equity, you are heading toward Type II.
- If you only want a lower rate and you already hold a VA loan, ask about the streamline IRRRL instead. It skips the appraisal and has its own tests.
Then run your own break-even. A bigger balance, a financed fee and a changed term can all change what you owe each month, so the comparison is yours to make. Ask your loan officer for the Loan Estimate and compare the new loan’s terms and your remaining equity against what you have now. VA also cautions borrowers to be careful with refinance offers, so take your time.
Lendmire’s piece VA Cash-Out Refinance Type I vs. Type II for a Veteran Taking Cash goes deeper on the cash-taking side.
Key Terms Defined
Certificate of Eligibility (COE): VA’s proof that you qualify for the home loan benefit.
Net tangible benefit (NTB): One of eight listed ways VA says a refinance must help the borrower.
Seasoning: The waiting period, in time and payments, before you can refinance a loan.
Residual income: The money left each month after taxes, debts and household living costs.
Funding fee: A one-time VA charge, financed into the loan and waived for exempt borrowers.
IRRRL: VA’s streamline refinance for an existing VA loan, with its own lower fee and tests.
Weighing a Cash-Out Against Keeping Your Loan
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, so it shops wholesale lenders and matches your file to the program. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Does the funding fee count when a lender decides Type I or Type II?
Yes. The comparison uses the new loan amount with the financed fee included. A loan that looks even with the payoff before the fee can tip into Type II once the fee is added. Exempt borrowers skip that effect.
Does my current loan have to be a VA loan?
No. A cash-out can refinance a conventional, FHA or USDA loan into a VA-backed loan. Seasoning is the main rule that depends on the loan type being paid off. It applies when the loan being replaced is VA-backed.
Do Type I loans need the rate-drop and recoupment tests?
Not in the programs Lendmire places VA cash-out files with. Those two tests are streamline (IRRRL) rules. A cash-out needs a listed net tangible benefit, full underwriting and an appraisal instead.
How much can I borrow against my home?
Up to 100% of the appraised value, with the financed funding fee counted inside that cap. A lender may set a lower ceiling than VA allows. Your appraisal, residual income and credit decide where the file lands.
Can I use a VA cash-out on a rental or second home?
Not for this program as designed. You must live in the home you are refinancing, so occupancy decides the leverage. Ask a loan officer about other options for a property you do not live in.
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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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
3. VA Lenders Handbook, Chapter 6
5. VA Loan Guaranty Conference: Refinancing Loans
6. VA.gov: Funding fee and closing costs
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.