The Quick Read: The two types differ on one question: is the new loan, funding fee included, bigger than the payoff of the old one? If it is bigger, you have a Type II, and it is the only type that puts real cash in your hands. If it is equal or smaller, you have a Type I, which is built for changing the loan rather than pulling money out. A veteran who wants even a modest amount of cash is almost always looking at a Type II.
Here is the honest answer on who each option is for. Type I fits a veteran with an existing VA loan who wants a different structure, such as a shorter term or a switch from adjustable to fixed, and who needs no cash back. Type II fits the veteran who wants some cash and is willing to take on a larger balance to get it. Both carry a full appraisal and a net tangible benefit test. Type I adds extra hurdles that Type II does not.
Key Takeaways
- The type is set by arithmetic: new loan plus funding fee versus the payoff of the old loan.
- Taking any cash back generally moves the file from Type I to Type II.
- Both types need an appraisal, full underwriting, and a “net tangible benefit,” which means the loan must leave you better off in a way VA recognizes.
- Type I VA-to-VA files carry a cost-recovery test that Type II files do not.
- A streamlined refinance generally cannot hand you cash, so it is not the answer to “small cash.”
Side-by-Side
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or below payoff, fee included | Above payoff |
| Cash to you | None or negligible | Yes |
| Leverage ceiling | 100% of appraised value, fee included | Same |
| Mortgage insurance | None | None |
| Credit floor | VA sets none; 580 on our wholesale programs | Same |
| Occupancy | You live in the home | Same |
| Documentation | Full underwriting, appraisal | Same |
| Cost-recovery test | Applies on VA-to-VA | Does not apply |
| Funding fee | 2.15% first use, 3.3% after | Same |
Every figure in that table is subject to lender guidelines and a full file review, and none of it is a commitment to lend. The credit floor row reflects the wholesale programs Lendmire places VA files with. VA itself sets no minimum score, and some lenders set a higher floor than ours.
How the Type Gets Decided (A 60-Second Check)
The lender classifies the loan with a three-step comparison. You can run it yourself before you ever talk to anyone.
1. Find the payoff of your current VA loan.
2. Add up the new loan amount, including the VA funding fee if you finance it.
3. Compare the two figures. A new loan at or below the payoff is Type I. A new loan above the payoff is Type II.
The word “cash-out” describes the loan structure, not your intentions. A Type I can leave you with nothing in hand. That surprises people who assume the label means money is coming.
Now the part few explainers cover: fee drift. The funding fee counts toward the new loan. On a first-use cash-out it is 2.15%, and after first use it is 3.3%. Say you call your payoff 100 (an index, not dollars). Financing a 2.15% fee on a new base loan of 100 puts the fee-inclusive loan at roughly 102. That is above the payoff, which makes it a Type II even though you asked for no cash.
So a file that looks like a Type I can tip into Type II once costs roll in. To stay in Type I, the fee and costs generally have to come from your own pocket, or the base loan has to be sized below the payoff. Whether that is practical depends on the file.
Why Two Types Exist
Congress told VA to regulate cash-out refinances after concerns about veterans being churned into loans that did not help them. VA responded by splitting cash-outs into categories. The key point for you: the split decides which tests your loan must pass.
If your goal is simply a different loan structure and no cash, Type I is the category that fits. Trying to make a cash goal fit Type I does not work, because even a small cash-back amount pushes the new loan past the payoff.
When Type I Is the Better Fit
Type I is the better fit when cash is not the point. These are the situations where it tends to make sense:
- You want a shorter term. Moving to a shorter schedule on the same VA loan is a structure change, and it can count as a net tangible benefit.
- You want to leave an adjustable loan for a fixed one. The goal is stability, not equity.
- You want to drop out of a construction-to-permanent loan. VA’s cash-out rules cover that situation whether or not the principal changes, per industry compliance summaries of the handbook revisions.
- You can bring cash to closing. Because the fee-inclusive loan cannot exceed the payoff, you may need to cover fees and costs yourself.
The trade-off is the extra scrutiny. For a VA-to-VA Type I, the lender must certify that your fees and costs will be recovered within 36 months. That is the recoupment test. VA’s Circular 26-19-05 sets it out and says it applies to Type I.
The same rules add rate-reduction requirements for certain Type I loans, such as a fixed loan being refinanced into another fixed loan. The details are technical. Describe them to your loan officer as “the strictest standards apply when a fixed VA loan is replaced,” and ask which ones touch your file.
Two clarifications keep people out of trouble. First, a Type I still needs the net tangible benefit test and a full appraisal. It is not a lighter category. Second, if what you really want is a lower rate with no cash and no appraisal, that is a different tool. Lendmire’s piece VA IRRRL vs. VA Cash-Out for a Veteran With an Existing VA Loan walks through that choice.
When Type II Is the Better Fit
Type II is the better fit when you want money in hand. For a veteran with an existing VA loan, that is the normal path to “small cash.” Lendmire arranges it through the VA cash-out refinance program, and the wholesale lenders it works with review each file.
Type II tends to make sense in these situations:
- You need a modest amount of cash for a specific purpose. Think a repair, a medical bill, or paying off a higher-cost balance.
- The cost-recovery test would hurt a Type I. Type II files do not face the 36-month recoupment test, according to VA’s own lender training slides.
- You are comfortable with a bigger balance. More principal means more interest over the life of the loan.
- You qualify on residual income. Residual income is what is left of your monthly income after taxes, debts and living costs. It is the controlling test on VA files. The 41% debt-to-income figure is a guideline, and a higher ratio needs residual income well above the standard minimum.
What stays the same? A Type II still needs a net tangible benefit, a full appraisal, seasoning, and full underwriting. Seasoning is the waiting period before a VA loan can be refinanced. On the programs we place with, it is the later of 210 days from your first payment and your sixth payment.
The cap is the other thing that does not change. Under 38 CFR 36.4306, the new loan cannot exceed 100% of VA’s reasonable value. Reasonable value comes from the appraisal. Any part of the funding fee that would push the loan above that line must be paid in cash at closing.
Some lenders set a lower leverage limit than VA does. That is a lender choice, not a VA rule. In the wholesale programs Lendmire places VA cash-outs with, the ceiling is 100% of the appraised value including the financed fee, with no mortgage insurance. Everything remains subject to guidelines and review.
Is Small Cash Actually Worth It?
This is the question the definitions skip. Small cash can disappear into costs.
VA’s cash-out page warns that closing costs can run to thousands of dollars and tells borrowers to understand how the new loan relates to the home’s value. VA News adds that allowable fees can be paid from loan proceeds, which reduces or removes the cash due to you at closing. In plain terms: the smaller the cash goal, the larger the share that costs can absorb.
Add the funding fee, which is financed and sits on top of the balance. Then add the larger balance itself. VA News also notes that a cash-out typically adds the cash to the loan and rarely lowers the monthly payment, so a lender promising both cash and a lower payment deserves a second look. Read the VA News explainer on this before you sign anything.
Here is a way to test a small-cash idea without a calculator or any dollar figures:
1. Write down the cash you actually need. Not the maximum equity reaches.
2. Ask for the cash you would net after the funding fee and closing costs. Your Loan Estimate and Closing Disclosure show this.
3. Compare it with the alternatives. A home equity line may leave your VA loan untouched. Lendmire’s comparison of a VA cash-out against a HELOC for a veteran keeping an existing VA loan lays out the trade-offs.
4. Check the net tangible benefit. If the only benefit is the cash, the file may not clear the test.
Honestly, this is a close call for many veterans. If your current loan has a structure you value, a small cash-out can cost more than the cash is worth. If your current loan is already a poor fit, the refinance may justify itself on structure and the cash is a bonus.
What the Net Tangible Benefit Test Looks For
Both types must pass it. The rule lists eight possible benefits, and a cash-out must meet at least one. VA’s 2023 lender training deck on refinancing confirms this. Common ones include:
- eliminating monthly mortgage insurance;
- moving to a shorter term;
- lowering the interest rate;
- lowering the monthly payment; and
- increasing monthly residual income.
Notice what is missing: “getting cash” is not on the list. The cash is your reason, but the test needs a structural improvement as well. This is why a veteran who wants only a little cash can still be turned down. The loan has to make financial sense on its own.
VA-to-VA Versus Other Loans
Seasoning and the 36-month recoupment test are VA-to-VA tests. If you are refinancing a conventional or FHA loan into VA, the analysis changes, and you should not apply the VA-to-VA tests to it. Since you already hold a VA loan, they apply to you.
One more point on occupancy. A VA cash-out requires that you live in the home you are refinancing. VA states that directly on its cash-out loan page. Occupancy, not a rental plan, decides which program applies.
Entitlement can also matter. With full entitlement there is no VA loan limit. With remaining entitlement a down payment may be required, so speak with a loan officer about your situation.
Documentation You Should Expect
Both types are full-underwriting loans. Expect to provide:
- your Certificate of Eligibility, which VA issues and which decides eligibility;
- income and asset documents;
- military service documents; and
- the existing VA loan’s payoff information.
The lender orders a VA appraisal. The appraiser sets the property’s reasonable value, and VA uses it to decide how much to guarantee. The lender also gives you a comparison disclosure at application and again at closing. That disclosure is where you should confirm which type you are getting.
If you are exempt from the funding fee, the fee drift described above shrinks or disappears. Exempt groups include veterans receiving compensation for a service-connected disability. Check your exemption status on the Certificate of Eligibility before assuming a fee applies. The cash-out fee does not shrink with a larger down payment on a refinance, as VA’s funding fee page states.
Common Mix-Ups
- “Type I means fewer rules.” It does not. Type I carries the same benefit test and appraisal, plus recoupment.
- “An IRRRL can add a little cash.” Generally it cannot. The handbook rounds the loan amount down to avoid putting cash in the veteran’s hands.
- “A cash-out lowers my payment.” VA News calls this very rare.
- “Ninety percent is the VA cap.” The rule’s cap is 100% of reasonable value. Any lower limit is a lender decision.
Key Terms Defined
Type I cash-out: A VA cash-out refinance where the new loan, funding fee included, does not exceed the payoff of the loan being refinanced.
Type II cash-out: A VA cash-out refinance where the new loan exceeds the payoff, so the borrower can receive cash.
Net tangible benefit: A test showing the new loan serves your financial interest in a way VA’s rule recognizes.
Recoupment: The period over which the fees and costs of the refinance are earned back, set at 36 months for a Type I VA-to-VA loan.
Seasoning: The waiting period after a VA loan begins before it can be refinanced.
Residual income: The money left each month after taxes, debts and living costs. On VA files it is the controlling test.
The Balanced Verdict
Choose Type I when you want the loan changed and not the cash. Accept its extra recoupment test and the likelihood that fees come out of your pocket. Choose Type II when you want money in hand. Accept the bigger balance, the added funding fee on that balance, and the chance that costs eat a small cash amount.
If your number is small, the honest move is to price it before you commit. A small cash-out that clears the net tangible benefit on structure alone can be a good decision. One that exists only to produce the cash often is not.
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 a Type I cash-out ever put cash in my hands?
Generally no, or only a negligible amount. A Type I keeps the fee-inclusive new loan at or below the payoff, which leaves no room for meaningful cash. If you want real money back, the file is a Type II.
Can a Type I turn into a Type II?
Yes, through fee drift. The financed funding fee counts toward the new loan, so a request for no cash can still push the total above the payoff. Ask your loan officer to show you the comparison before you apply.
Can an IRRRL give me a little cash instead?
Generally not. The streamlined refinance is designed for a lower rate or a switch from adjustable to fixed, with no VA appraisal, and the loan amount is rounded down to avoid cash to the veteran. A small-cash goal usually points to a cash-out.
Is 90% loan-to-value a VA rule?
No. VA’s rule caps the new loan at 100% of reasonable value. Some lenders choose a lower limit, which is their own overlay. The wholesale programs Lendmire places VA cash-outs with reach 100% of appraised value, including the financed fee, subject to guidelines and review.
Does recoupment apply to a Type II?
No. VA’s lender training materials state recoupment applies to Type I. A Type II still must pass the net tangible benefit test, seasoning and a full appraisal.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
3. VA News: You could be losing thousands on your home loan
4. 2023 lender training deck on refinancing
5. VA.gov: Cash-out refinance loan
6. VA.gov: Funding fee and closing costs
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: VA Cash-Out Net Tangible Benefit Rules With an Existing VA Loan · Can a VA Cash-Out on a VA Jumbo Loan Fund Your Next Home? · VA Cash-Out Cap Requirements for a Jumbo Loan Above the Conforming Limit
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.