The Quick Read: Usually, but only when the private note is a recorded lien against the home you live in. A VA cash-out can pay off liens of record from any source, current or delinquent. An unsecured IOU, or a handshake loan from a family member, generally does not qualify as the lien that makes the refinance eligible. Buying out a business partner is a different question, and a lender has to confirm it against VA’s rules before you count on it.
What Counts as a Private Note Here?
A private note is a loan from a person or private business instead of a bank. The note is the promise to pay. The lien is the legal claim against your home that secures that promise. VA cares about the lien.
Think of three common situations:
- Seller-carry note. The person who sold you the home financed part of the price, and a lien was recorded.
- Family or friend loan. A relative lent you money. Maybe a lien was recorded, maybe not.
- Partner or co-owner arrangement. Someone put money into the home, or into a venture tied to it, and you owe them.
The first is usually clean. The second depends entirely on whether paperwork was recorded. The third needs more than one answer, which is why this article splits “partner” into two cases below.
Does the Note Have to Be a Recorded Lien?
Yes. A VA cash-out refinance is a refinance of existing mortgages “and/or other indebtedness secured by a lien(s) of record.” Other recorded liens, such as second mortgages and mechanics liens, can also qualify. The liens can be current or delinquent.
The flip side matters just as much. A home with no recorded lien at all is not eligible for a VA refinance. With nothing to refinance, there is nothing for the new loan to replace.
So a recorded private note is fair game. An unrecorded one is a problem. A family loan that lives only on a signed piece of paper is not a lien of record. Whether a lender can pay it from cash-out proceeds when a separate recorded lien is also being paid off is not something the published VA material clearly addresses. Send that question to the lender and VA before you plan around it.
Lendmire is a mortgage broker, so it arranges VA loans through wholesale lenders in 16 states. In that work, the first thing a loan officer asks about any private debt is simple: is there a recorded lien, and can you produce it?
How Does a VA Cash-Out Work When the Payoff Goes to a Person?
The loan is a normal VA cash-out. The only difference is who gets paid at closing. Here is the flow:
1. You confirm eligibility. You need a Certificate of Eligibility (COE), which is VA’s document showing you qualify. Service requirements are VA’s rules, and the COE decides. VA home loans come from private lenders, with VA guaranteeing a portion.
2. You occupy the home. VA cash-out is for the home you live in. It is not for investment property.
3. The lender orders a full appraisal and underwrites you. Unlike a streamlined refinance, a cash-out needs a full appraisal, credit review and income review.
4. The note holder provides a payoff statement. It shows the exact balance owed, with a good-through date and daily interest.
5. Title or escrow pays the holder directly. The holder then releases the lien, and the release gets recorded.
6. The new VA loan takes first-lien position. Federal law requires a VA loan to be secured by a first lien, so older liens are paid off or subordinated. Paying off is the cleaner path.
7. Leftover proceeds come to you. Anything above the payoffs and costs can go to the borrower for any purpose acceptable to the lender.
The lien position is the part people miss. If the private note is recorded and stays in place, its holder would have to agree to subordinate. Most private holders would rather be paid off.
How Much Can the New Loan Be?
The new loan can reach 100% of the home’s appraised value, including the financed funding fee. The federal regulation, 38 CFR 36.4306, sets that ceiling. VA Circular 26-19-05 confirms that VA no longer guarantees refinances above 100% and that a financed fee counts toward the limit.
Here is the practical effect. The funding fee, the payoffs, the closing costs and any cash to you all come out of the same equity. A low appraisal shrinks everything at once.
The funding fee on a cash-out refinance is 2.15% for first use and 3.3% for later use. It is waived for veterans who receive compensation for a service-connected disability and for the other exempt groups. You can finance it, but remember it eats into that 100% ceiling.
Some lenders set a lower cash-out cap than VA’s own ceiling. Across the wholesale programs Lendmire places files with, the VA cash-out reaches 100% of the appraised value, including the financed fee. Everything is subject to lender guidelines and full file review.
The Three Checks That Decide Eligibility
Is the note secured?
This is the gatekeeper. A recorded lien keeps you in the game. No lien, and the refinance has nothing to attach to.
Can you qualify for the whole new balance?
You are not just borrowing the equity. You are qualifying for the full new first-lien balance, which includes the payoff. VA sets no minimum credit score. The wholesale programs Lendmire works with start at a 580 decision score, and some lenders set a higher floor.
Residual income is the controlling test. That is the money left each month after taxes, debts and basic living costs. The 41% debt-to-income figure is a guideline, not a cap. A higher ratio needs residual income well above the table.
Does the loan pass the net tangible benefit test?
A net tangible benefit (NTB) means the refinance must leave you better off in a measurable way. The regulation lists the qualifying tests, such as a lower payment, a shorter term, higher residual income, or converting an adjustable loan to a fixed one. A loan at or under 90% of reasonable value is another path. You need to meet at least one.
If you are consolidating a private note into your first mortgage, the lender has to show which test the new loan passes. That is worth asking about at the start.
Type I or Type II?
VA sorts cash-outs into two types. A Type I has a loan amount, including the fee, that does not exceed the payoff of the loan being refinanced. A Type II exceeds that payoff.
If you pay off a private note and also replace your first mortgage, the new loan will usually exceed the old first-mortgage payoff. That points to a Type II structure. VA’s system makes the final call, not the loan officer.
Does Seasoning Apply?
Only when the loan being paid off is itself a VA loan. Seasoning is a waiting period. For a VA-to-VA refinance, it is the later of 210 days from your first payment and your sixth monthly payment. VA Circular 26-19-22 lays that out.
If your first mortgage is conventional or FHA, VA’s circular ties seasoning to refinancing a VA-guaranteed loan. A private note does not trigger a seasoning clock of its own in VA’s published material.
What About a Partner?
“Partner” can mean two very different people. Treat them separately.
| Factor | Note-holding partner | Co-owner on title |
|---|---|---|
| What they hold | An IOU from you | Ownership interest |
| Lien on the home? | Only if recorded | Not a lien |
| What ends the claim | Payoff and release | A transfer of title |
| VA cash-out fit | Possible if lien of record | Unconfirmed; lender must verify |
A partner who lent you money is a creditor. If their loan is a recorded lien on your home, the payoff mechanics above apply.
A partner who owns part of the home is a buyout, which is a title transfer. Published VA guidance does not clearly address buying out a co-owner with cash-out proceeds. Treat that framing as unverified until a lender confirms it against VA’s handbook.
One related rule is verified. The lien being paid off does not have to be in your name. A spouse’s loan is reviewed, provided you are an owner at closing. That does not stretch to a business partner’s separate stake.
What Documents Will Title and the Lender Want?
Expect a package like this:
| Document | What it proves |
|---|---|
| The signed note | The debt and its terms |
| Recorded lien or deed of trust | The debt is secured against the home |
| Payoff statement | Exact balance, good-through date, daily interest |
| Release of lien | The claim ends once paid |
| Funding record | What the debt originally paid for |
Related-party holders get extra scrutiny. If the holder is a relative or someone connected to you, the lender wants to see the money trail clearly. Sloppy paperwork is the usual reason these files stall.
Among files with private holders, the stronger ones arrive with the recorded lien and a clean payoff statement before the application starts. Gathering those first saves everyone grief.
When Is VA Cash-Out the Wrong Tool?
Sometimes it simply does not fit. Common cases:
- The IRRRL. The VA interest rate reduction loan can only pay off the existing VA loan and closing costs. It cannot take equity out or pay other debts. The one narrow cash exception is reimbursement for certain energy-efficiency improvements.
- No recorded lien on the home. Nothing to refinance.
- Unrecorded family loan. Without a lien, this does not make the refinance eligible.
- The home is not your residence. VA cash-out is for the home you occupy.
In those cases, the other paths run through different products and different lenders. A home equity line or a conventional cash-out might fit better. Lendmire’s piece Can a Bank Statement Cash-Out Pay Off a Private Note or Partner? covers a path for people who can’t document income the standard way. The tradeoff is that you leave VA’s benefits behind.
What Does This Cost You?
A bigger first lien, plus a fee and closing costs. VA’s own page warns that closing costs can add up to thousands of dollars and urges you to understand how the new loan relates to your home’s value. Cash-out is not free money.
Two habits protect you. First, compare like with like. In an enforcement action, the CFPB found that a lender showed only principal and interest on the new loan next to an old payment that included taxes and insurance. The new loan looked cheaper than it was. Second, expect two standardized comparison disclosures: one after you apply, and one at closing, with timing that varies by file and lender.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Common Mistakes and Myths
- “An IRRRL can clear my other debts.” It cannot.
- “Any debt I owe can be rolled in.” The test is a lien of record on the home.
- “No credit check is needed.” A cash-out needs full underwriting.
- “VA caps cash-out at 90%.” The regulation sets a 100% ceiling. The 90% figure is one net tangible benefit path, and individual lenders may set their own caps.
- “The cash is free.” It is a larger loan with a funding fee and closing costs.
- “Offers promising cash, skipped payments and no costs are VA-approved.” The CFPB and VA have jointly warned veterans about unsolicited offers that sound too good to be true.
Lendmire’s piece Should a High-DTI Veteran Use a VA Cash-Out to Pay Off Debt? goes deeper on the debt-consolidation side.
Key Terms Defined
Lien of record: A legal claim against your home that has been filed in public records.
Certificate of Eligibility (COE): The VA document that confirms you qualify for a VA loan.
Net tangible benefit (NTB): A required, measurable improvement in your finances from the refinance.
Residual income: The money left each month after major obligations, which VA treats as the controlling test.
Seasoning: A required waiting period before a VA loan can be refinanced into another VA loan.
Subordination: An agreement by a lien holder to rank behind the new first mortgage.
Frequently Asked Questions
Can a VA cash-out pay off a family loan with no mortgage paperwork?
Generally no, not as the lien that makes the refinance eligible. VA’s published handbook ties eligibility to liens of record. If the loan was never recorded, a lender will probably treat it as ordinary unsecured debt. Ask a loan officer how it would be handled alongside a recorded lien, because the published material does not clearly answer that.
Does the private note holder have to be a bank or business?
No. The holder can be an individual or a private entity. What matters is that the debt is secured by a recorded lien on your home. Expect the lender to ask for the note, the lien record and a payoff statement from the holder.
Can I use a VA cash-out to buy out a business partner or co-owner?
Unconfirmed. VA’s published guidance does not clearly address co-owner buyouts. A creditor partner with a recorded lien is one situation. A partner on title is a title transfer and a different question. A lender should confirm it against VA’s handbook before you rely on it.
Do I need to wait before refinancing if I have a private note?
Not because of the note. Seasoning applies when the loan being paid off is a VA loan: the later of 210 days from your first payment and your sixth payment. A conventional or FHA first mortgage does not trigger that clock under VA’s circular.
Will the new loan need mortgage insurance?
No. VA loans carry no mortgage insurance of any kind. They do carry a funding fee, which is waived for veterans receiving compensation for a service-connected disability and for other exempt groups.
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. The VA cash-out refinance program page is a good place to start, and nothing here is a commitment to lend.
For your own numbers, 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
5. VA.gov, Cash-out refinance loan
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: Conventional vs VA Cash-Out for a Veteran Weighing the Funding Fee · VA Cash-Out Net Benefit Test for a Veteran With an Existing VA Loan · Can a Veteran Do a VA Cash-Out on a 2-4 Unit Primary Home?
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.