The Quick Read: A VA cash-out refinance is Type I when the new loan, including the funding fee, does not exceed the payoff of what you are replacing. It is Type II when the new loan is larger than that payoff, which is how you walk away with cash. With an existing VA loan, Type I carries the stricter tests. Type II still needs a net tangible benefit, an appraisal, and a full credit and income review.
Key Takeaways
- The dividing line is simple: new loan amount (fee included) versus the payoff.
- Type II is the one that puts cash in your pocket. Type I may put none.
- The new loan can reach 100% of the appraised value, with the financed fee counted inside that limit.
- Your old VA entitlement carries into the new loan. It is not a fresh pool.
- Seasoning applies when the loan being paid off is a VA loan.
What Makes a VA Refinance Type I or Type II?
The test is arithmetic. Add up the payoff of the loan and liens you are replacing. Then look at the new loan, including the VA funding fee if you finance it. If the new loan is the same or smaller, that is Type I. If it is bigger, that is Type II.
Here is the part most people miss. The names do not describe what you want. They describe the numbers. VA Circular 26-19-05 sets out these definitions and lists three refinance categories: the IRRRL, Type I and Type II.
Picture a borderline case. You owe a certain balance and want no cash. But you finance the funding fee, and the new loan lands a bit above the payoff. That tips a Type I into a Type II. The fee counts toward the total, so it can change your category without any cash reaching you.
This is also why a Type I can pay off either a VA loan or a non-VA loan. An IRRRL, by contrast, only refinances an existing VA loan. If you are weighing the product as a whole, Lendmire’s VA cash-out refinance program page lays out how it fits with your other options.
How Is a VA Cash-Out Underwritten, Step by Step?
The VA cash-out is a full-documentation loan. It is not a streamlined product. Across the wholesale programs Lendmire places VA files with, the sequence runs like this.
1. Eligibility. Your certificate of eligibility (COE) confirms your entitlement and what is charged against it.
2. Classification. The lender compares the new loan, fee included, to the payoff. That sets Type I or Type II.
3. Appraisal. A VA appraisal sets the reasonable value. A low number shrinks the maximum loan.
4. Seasoning check. This applies only if the loan being paid off is a VA loan.
5. Net tangible benefit. The loan must meet at least one listed benefit (more on that below).
6. Disclosures. You receive a loan comparison and an estimate of the equity being removed.
7. Credit and income review. Residual income is the controlling test. The 41% debt-to-income figure is a guideline, not a cap. A ratio above it needs residual income well above the table.
On credit: VA sets no minimum score. The wholesale programs Lendmire works with start at a 580 decision score. Some lenders set a higher floor. Everything here is subject to lender guidelines and full file review, and nothing is a commitment to lend.
You must also live in the home. VA’s cash-out loan page lists three conditions: a valid COE, meeting credit and income standards, and occupying the home you are refinancing. That differs from an IRRRL.
How Much Can You Borrow?
The new loan can reach 100% of the appraised value. The federal regulation behind the program says the loan may not exceed 100 percent of reasonable value. It also says any piece of the funding fee that would push the loan past that line must be paid in cash at closing.
With full entitlement there is no VA loan limit. The wholesale programs Lendmire places VA loans with serve amounts up to $4,000,000 with full entitlement. If you have only remaining entitlement, speak with a loan officer about what applies to you.
Two cautions. First, some lenders set their own lower cash-out caps. Those are lender policies, called overlays, not VA rules. Second, an appraisal that comes in short can block a cash-out entirely, because the 100% ceiling is measured against that value.
No mortgage insurance applies to a VA loan.
What Is the Net Tangible Benefit Test?
Every VA cash-out must show a net tangible benefit. The loan has to meet at least one item on the list in 38 CFR 36.4306. The list includes:
- eliminating monthly mortgage insurance;
- a shorter loan term;
- a lower interest rate;
- a lower monthly payment;
- higher residual income;
- refinancing an interim construction loan;
- a new loan at 90 percent or less of reasonable value;
- converting an adjustable-rate loan to a fixed one.
This is where a cash-out can look odd. A Type II takes more debt on purpose. So it usually meets the test through another item, such as moving from adjustable to fixed or landing at 90 percent or less of value. For a deeper walk-through, see Lendmire’s piece VA Cash-Out Net Tangible Benefit Rules With an Existing VA Loan.
Where Do Type I and Type II Rules Split?
The split matters most when you are replacing an existing VA loan. Type I cash-outs must meet the net tangible benefit requirement and also recoup fees and charges within 36 months. The regulation says that on a Type II, the borrower is treated as having recouped costs once the net tangible benefit requirements are met.
Think of Type I as a rate-and-term refinance in disguise. You are not pulling equity, so VA wants proof that the swap actually helps you. Type II takes cash, but the recoupment test is treated as satisfied once the benefit test is met.
The National Consumer Law Center’s comment letter on the rule makes the same point. It says the strictest standards fall on loans refinancing an existing VA loan where the payoff equals or exceeds the new loan. Weaker standards apply to non-VA payoffs, though a net tangible benefit is still required.
| Item | Type I | Type II |
|---|---|---|
| New loan vs. payoff | Same or smaller | Larger |
| Cash to you | None, or minimal | Yes |
| Net tangible benefit | Required | Required |
| Recoupment | Within 36 months | Treated as met |
| VA seasoning | If paying off a VA loan | If paying off a VA loan |
Exact seasoning counts and rate-reduction tests vary by lender and loan scenario. The wholesale programs Lendmire works with use a seasoning standard of the later of 210 days from the first payment and the 6th payment. Closing too early cannot be fixed afterward, because VA says a loan that has not seasoned is not eligible for the guaranty.
What Happens to Your Existing VA Loan and Entitlement?
A cash-out replaces your current loan entirely. The old rate and terms go away, and you get a new balance, a new term and a new payment. If your current loan has terms you like, that is a real cost of doing this.
Entitlement works differently than many people expect. Under the regulation, the refinanced portion of the new loan is treated as obtained with the entitlement already used on the old loan. So the old entitlement carries into the new loan. It is not a fresh pool.
If your goal is freeing entitlement to buy another home, that is a separate path. Restoration rules apply there, and a cash-out on the same house does not do it. Lendmire’s piece on VA cash-out entitlement rules covers that in more depth.
What Does the Funding Fee Do to the Numbers?
The VA cash-out funding fee is 2.15% on first use and 3.3% after first use. VA’s funding fee page shows these cash-out figures do not change with a down payment. Veterans receiving compensation for a service-connected disability, and other exempt groups, do not pay it.
You can finance the fee into the loan, which is why it counts toward the Type I or Type II test. For comparison, the IRRRL fee is 0.5% unless exempt.
Also note that VA warns closing costs can add up. Because cash-out proceeds are added to the new loan, the balance rises, and so does the interest you pay over the life of the loan. Allowable costs can be paid from proceeds, which may reduce the cash you bring to closing.
Which Path Fits Your Goal?
Match the product to what you actually need.
| Your goal | Likely fit |
|---|---|
| Lower rate or fixed loan on a VA loan, no cash | IRRRL |
| Same, but the IRRRL does not fit | Type I |
| Cash from equity | Type II |
| Move a non-VA loan into VA | Type I (or Type II with cash) |
| Keep a low existing rate and need cash | Compare against keeping the loan |
An IRRRL needs no VA appraisal and carries a net tangible benefit and seasoning of its own. A cash-out brings the appraisal and full underwriting. If you want no cash and your loan is already VA, ask whether the IRRRL does the job first.
Where the Rules Break
A few cases catch people off guard:
- No existing lien. A home with no mortgage or lien of record is not eligible for the guaranty on a refinance.
- Not living there. The occupancy requirement is firm. This program is for the home you live in.
- Short appraisal. The 100% ceiling can shut the door if value comes in low.
- Early closing. Seasoning on a VA-to-VA cash-out cannot be repaired after the fact.
- State limits. State law can limit cash-out on homestead property in some places.
- Construction loans. VA treats refinancing of construction loans under the cash-out rules regardless of any change in principal.
Common Misconceptions
“You need an existing VA loan.” No. VA says the cash-out can refinance a non-VA loan into a VA loan.
“Cash-out means you must take cash.” No. A Type I may put nothing in your hands.
“VA caps cash-out at 90%.” The VA ceiling is 100% of reasonable value. Lower caps are usually lender policy.
“The fee is waived on refinances.” It applies unless you are exempt.
“Under 100% means approved.” The loan must also pass the net tangible benefit test and underwriting.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Seasoning: the waiting period VA requires before an existing VA loan can be refinanced into a cash-out.
Net tangible benefit: a listed improvement, such as a shorter term or a fixed rate, that the new loan must deliver.
Recoupment: earning back the fees and costs of the refinance through savings, within a set period.
Entitlement: the amount of VA guaranty you have available, which carries into a VA-to-VA cash-out.
Residual income: the money left each month after major obligations, which is the controlling VA underwriting test.
Frequently Asked Questions
Can I do a Type II cash-out if I already have a VA loan?
Yes, if the loan being paid off has seasoned and the new loan passes the net tangible benefit test. The new loan must also stay within 100% of the appraised value, with any fee overage paid in cash. Credit and income are reviewed in full, subject to lender guidelines.
Does a Type I refinance ever put cash in my hands?
Usually not. A Type I keeps the new loan at or below the payoff. Allowable costs can be paid from the loan, which may reduce what you owe at closing, but you are not pulling equity.
Does the old entitlement come back after a cash-out?
No. The old entitlement carries into the new loan. Restoring it for another purchase follows separate rules, such as selling the home or paying off the VA loan.
Will financing the funding fee change my loan type?
Financing the fee can change it, because the fee counts toward the new loan amount. If it pushes the total above the payoff, the refinance becomes Type II.
Is the VA loan limit a problem for a cash-out?
Not with full entitlement, since there is no VA loan limit. With remaining entitlement, speak with a loan officer about what applies.
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 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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References
2. VA.gov: Cash-out refinance loan
5. National Consumer Law Center’s comment letter
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: How Much a Funding Fee Costs on a VA Cash-Out With an Existing VA Loan · VA Cash-Out Funding Fee Rules for a Fee-Exempt Veteran · Can a VA Cash-Out Lend Full Value on a VA Jumbo Loan?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.