The Quick Read: A Type II VA cash-out releases whatever is left after the new loan pays off your old one, covers the financed funding fee, and covers any costs paid from proceeds. The loan, funding fee included, has to come out larger than the payoff, or the file is a Type I with no cash. On a small request, fees can eat most of the cash. The appraised value, your payoff balance, and the lender’s leverage limit decide the number.
Key Takeaways
- Type II means the new loan, including the financed funding fee, is larger than the balance being paid off.
- Net cash is the loan amount minus the payoff, minus the financed fee, minus costs paid from proceeds.
- The funding fee on a cash-out is 2.15% on first use and 3.3% on later use, unless you are exempt.
- A thin equity cushion turns “small cash” into “almost no cash,” or into a Type I file.
- A Type II still needs full underwriting and a net tangible benefit, and the IRRRL’s rate-reduction and fee-recoupment tests do not apply to it.
What Does “Type II” Actually Mean?
A Type II VA cash-out is a refinance where the new loan amount, including the VA funding fee, exceeds the payoff of the loan being replaced. That is the whole definition. VA’s own circular, VA Circular 26-19-05, draws the line there: above the payoff is Type II, at or below it is Type I.
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.
So “small cash” is still Type II. The cash is simply the sliver left over after the old lien is paid off. If the sliver disappears, the file drops to Type I.
Here is the practical picture. Say your home appraises well above what you owe. You ask for a modest amount of cash. The lender builds a new loan big enough to pay off the old lien, roll in the funding fee, and leave your cash behind. If your equity is thin, the fee and costs take up almost all of it.
Your equity and your cash are not the same number, because the fee and costs come out of the difference. Lendmire’s VA cash-out refinance program page gives the overview of how the product fits together.
How Is the Cash Amount Worked Out?
Net cash equals the maximum loan the value allows, less the payoff, less the financed funding fee, less any costs paid from proceeds. Four inputs drive it: the appraised value, your payoff, the leverage the lender will use, and your credit and residual income.
Walk through it step by step:
1. Start with value. The VA appraisal sets reasonable value. The appraisal drives the maximum loan.
2. Apply the ceiling. The VA cash-out reaches 100% of the appraised value, funding fee included, on full entitlement. Congress gave VA that authority, as the Federal Register rule on cash-out refinances explains. Some lenders set a lower ceiling than VA does.
3. Subtract the payoff. That includes the balance, accrued interest, and any other liens you refinance. A cash-out can pay off any type of lien, which changes the payoff number.
4. Subtract the financed funding fee. It rides inside the loan.
5. Subtract costs paid from proceeds. VA notes that cash-out loans typically do not require cash at closing from the veteran. The costs come out of your cash instead, per VA News.
What remains is the check you receive.
Where Does the Money Go? (A Walk-Through in Percentages)
Run the numbers on a modeled home, using percentages only. Assume you owe 80% of the appraised value on a non-VA loan. A first-use cash-out carries a 2.15% funding fee on the new loan amount. Add costs that commonly land in the low single digits as a share of the loan, which varies by lender and file.
Fee and costs together can take several percent of the home’s value. If your cash-out request was only a few percent of value, those charges may swallow nearly all of it.
| Where it goes | What it does to your cash |
|---|---|
| Payoff of the old loan | Comes first, fully covered |
| Financed funding fee | Added to the loan, subtracted from cash |
| Costs paid from proceeds | Subtracted from cash |
| Whatever remains | Your net cash |
Now picture a second owner who owes only 60% of value. The same fee and costs take a much smaller bite out of a much bigger cushion. Same program, very different result.
The takeaway is simple. Small cash plus a high existing balance means thin results. Ask the loan officer for the net cash figure before you pay for anything.
Why Does the Funding Fee Matter So Much on Small Cash?
The funding fee is a one-time charge, and on a cash-out it is 2.15% for first use and 3.3% for later use. Veterans receiving compensation for a service-connected disability, and other exempt groups, do not pay it. VA’s funding fee page confirms the fee is one-time and that refinance fees do not change with your down payment.
The fee is a percentage of the new loan, so it scales with the whole balance, not with your cash. That is the catch. A 2.15% fee on a large loan can exceed a small cash request by itself.
Two points to keep straight:
- You can finance the fee. Financing it raises the loan, which also helps push the file above the payoff and into Type II.
- A later-use fee of 3.3% costs more than first use, so a repeat borrower sees less net cash on the same equity.
(Exempt veterans keep that whole slice of cash. It is worth confirming your status on your certificate of eligibility before you assume you owe it.)
How Do Type I and Type II Compare?
The difference is whether the loan exceeds the payoff, and that decides what the file looks like.
| Factor | Type I | Type II |
|---|---|---|
| Loan vs. payoff | At or below payoff | Above payoff |
| Cash to you | None | Yes, whatever is left |
| Net tangible benefit | Required | Required |
| Seasoning (VA-to-VA) | Applies | Applies |
The half-percent rate-reduction and fee-recoupment tests are IRRRL rules, and they never apply to a VA cash-out of either type. A Type II therefore does not have to lower your payment, though it still needs a net tangible benefit and the same seasoning.
What Underwriting Does a Type II Require?
A VA cash-out is not a streamline. It gets full underwriting: credit, income, employment, and assets are all documented. Residual income is the controlling test. That is the money left each month after your obligations and living costs. The 41% debt-to-income figure is a guideline, not a cap, though a ratio above it needs residual income well above the VA table.
On credit, VA itself sets no minimum score. The wholesale programs Lendmire places VA loans with start at a 580 decision score. Some lenders set a higher floor. All of this is subject to lender guidelines and full file review.
Your certificate of eligibility from VA decides eligibility. Service requirements are VA’s rules.
Underwriting follows this order:
1. Confirm eligibility and entitlement.
2. Check seasoning if the loan you are paying off is a VA loan.
3. Order the appraisal and check minimum property requirements.
4. Document credit, income, and residual income.
5. Run the net tangible benefit test and give you a before-and-after comparison.
6. Close, pay off the old lien, and release any remaining cash.
What Is the Net Tangible Benefit Test?
Net tangible benefit means the new loan is in your financial interest. 38 CFR 36.4306 requires it, and the lender must give you the test and satisfy it. VA lists eight qualifying benefits. Examples include eliminating monthly mortgage insurance and moving to a shorter term. The loan has to meet one of the eight.
Think about what that means for small cash. Getting cash is not, by itself, a listed benefit. The lender documents which listed benefit your loan meets. A common route is paying off a non-VA loan that carried mortgage insurance, since VA loans carry none.
One more thing people mix up. VA treats keeping 10% equity, a 90% loan-to-value criterion, as one criterion among many that shows benefit. It is not a hard cap on the loan.
Does Seasoning Apply?
Only when you are refinancing a VA loan. Seasoning is the waiting period before a refinance is allowed. On VA-to-VA cash-outs, the first payment on the old loan must be at least 210 days before closing, and you must have made at least six monthly payments. VA’s Lenders Handbook, Chapter 6 sets out the structure.
Paying off a conventional or FHA loan? Seasoning does not apply. You still need the net tangible benefit.
Where the General Rule Breaks
Several edge cases change the answer.
The Type II that flips to Type I. Rolling costs into the loan raises it, but not always past the payoff. If the total, funding fee included, lands at or below the payoff, the file is Type I. That means no cash, though it is still a VA cash-out, so the rate-reduction and fee-recoupment tests, which are IRRRL rules, still do not apply.
The short appraisal. If the appraisal comes in below your estimate, the maximum loan shrinks. A small cash-out can become no cash-out overnight. This is why homeowners with thin equity should treat their estimated cash as a maybe.
An IRRRL. This is a refinance of an existing VA loan to a lower rate or from adjustable to fixed. It pays no cash and cannot pull equity. Its fee is 0.5% unless you are exempt.
Other liens. A cash-out can refinance any type of lien. A second mortgage in the payoff reduces your cash dollar for dollar.
Lender limits below VA’s. VA’s ceiling is not every lender’s ceiling. Some cap leverage lower, set higher credit floors, or add their own seasoning. A broker can compare programs, which matters most on thin-equity files.
Occupancy. A VA cash-out is for the home you live in. If your situation involves a rental or second home, occupancy decides leverage, and VA’s occupancy rules apply.
Is Small Cash Worth Doing?
Often not, but it depends on what else the refinance does for you. The question is whether the cash is the point or a side effect.
Borrowers tend to land in one of three places:
- The cash is the point and equity is deep. A Type II works well. Fees take a small share.
- The cash is the point and equity is thin. Costs may consume most of it. Compare other options before applying.
- The benefit is the point. Dropping mortgage insurance or shortening the term is the goal, and the cash is a bonus.
Think about the long-term cost too. A larger balance on a fresh schedule means more interest over time.
The Federal Reserve’s guide to refinancing cautions against using a cash-out to pay down unsecured or short-term debt without advice. The CFPB’s guide to using home equity reminds borrowers that it is a loan that must be repaid, with foreclosure risk. Borrow no more than you need.
Questions worth asking any lender before you apply:
- What net cash do you expect after the fee and costs?
- Does the file land as Type I or Type II?
- Which net tangible benefit does my loan meet?
- Is your leverage limit lower than VA’s?
- How does my funding fee tier apply to my entitlement?
Key Terms Defined
Type II cash-out: a VA refinance where the new loan, funding fee included, exceeds the payoff of the old loan.
Net tangible benefit: a documented financial advantage to you, drawn from VA’s list of eight.
Seasoning: the waiting period on a VA loan before it can be refinanced.
Residual income: the money left each month after debts and living costs, the controlling VA test.
Entitlement: the amount of VA guaranty available to you, which affects the fee tier on later use.
Recoupment: a test of whether fees are earned back through savings, applied to IRRRL files.
Frequently Asked Questions
How much cash will a Type II give me?
It depends on value, payoff, and the lender’s leverage limit. The VA cash-out reaches 100% of appraised value including the financed fee. Subtract the payoff, the fee, and costs from proceeds. What is left is yours, and it is often much less than your raw equity.
Does the funding fee count when deciding Type I or II?
Yes. VA counts the loan amount including the funding fee against the payoff. If that total exceeds the payoff, it is Type II. If it does not, it is Type I.
Can I do a Type II if my current loan is not a VA loan?
Yes. A cash-out can refinance any loan type into VA. Seasoning does not apply to a non-VA payoff, but you still need a net tangible benefit.
Does a Type II have to lower my payment?
No. The loan must show a net tangible benefit, but the half-percent rate-reduction and recoupment tests are IRRRL rules and never apply to a VA cash-out of either type.
Why might my cash come in lower than I expected?
The appraisal may come in lower, or the financed fee and costs may be larger than you assumed. Other liens in the payoff reduce it too. Everything depends on lender guidelines and full file review, and nothing here is a commitment to lend.
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. For your own numbers, request a scenario review.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. 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
2. Federal Register: cash-out refinance rule
3. VA funding fee and closing costs
4. VA News
6. VA Pamphlet 26-7, Chapter 6: Refinancing Loans
7. Federal Reserve: refinancing guide
8. CFPB’s guide to using home equity
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: How Much Cash Comes Out of a VA Cash-Out Refinance to Go Fixed?
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.