The Quick Read: A Type I is a VA cash-out refinance where the new loan, funding fee included, does not exceed the payoff of what you are refinancing. A Type II is any cash-out where the new loan is larger than the payoff. Both need a net tangible benefit. Type I adds extra tests on top when the old loan is also a VA loan.
The type is not something you choose on an application. It falls out of a comparison: new principal against the payoff. Since the funding fee can be financed, a small change in costs can shift a file from one type to the other. That is why the paperwork differs, and why this article walks through it step by step.
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: 7.32% as of October 22, 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.
Key Terms Defined
Type I: A VA cash-out refinance in which the new loan amount, including the financed funding fee, does not exceed the payoff of the loans or liens being refinanced.
Type II: A VA cash-out refinance in which the new loan amount, including the funding fee, exceeds the payoff of the loans or liens being refinanced.
Net tangible benefit (NTB): A required test showing the refinance leaves the borrower better off in at least one way the VA regulation lists, such as removing monthly mortgage insurance or shortening the term.
Seasoning: The waiting period on an existing VA loan before it can be refinanced into a new VA loan.
Recoupment: A requirement that certain fees and closing costs be earned back through savings within a set period.
Residual income: The money left each month after major obligations and living costs, which is the controlling test in VA underwriting.
What Is a VA Cash-Out Refinance, and Why Does Type I Exist?
A VA cash-out refinance replaces an existing mortgage or lien with a new VA-guaranteed loan, and it can reach up to 100% of the home’s appraised value, funding fee included. That makes it the VA option for pulling equity, paying off a second mortgage, or moving a non-VA loan into the VA program.
Congress split the rules by payoff size. Public Law 115-174 set different requirements depending on how the new loan compares with the loan being refinanced, and VA responded by sorting these loans into two types under 38 CFR § 36.4306. The details live in Chapter 6 of the VA Lenders Handbook, and Lendmire’s VA cash-out refinance program page covers how the loan fits alongside other VA options.
Why call a Type I “cash-out” when you may receive nothing? Because of how the loan is built, not what you walk away with. It can pay off a non-VA loan, a second mortgage, or a mechanics lien, and it does not carry the narrow rules of a streamline. VA files it under cash-out. Many borrowers do the same thing with a Type I that they would with a rate-and-term refinance.
One condition applies to both types: there has to be an existing mortgage or lien of record. A home with no lien on it is not eligible for a VA cash-out guaranty.
Type I vs. Type II at a Glance
Type I and Type II differ in what the new loan does, what extra tests apply, and what VA expects in the file. Here is the side-by-side, drawn from the Handbook and VA’s own quick-reference guide.
| Factor | Type I | Type II |
|---|---|---|
| New loan vs. payoff | At or below payoff | Above payoff |
| Cash to borrower | Possibly none | Yes |
| Net tangible benefit | Required | Required |
| Seasoning (VA-to-VA) | Required | Required |
| Recoupment (VA-to-VA) | Required | Not a Type II item |
| Appraisal, full underwriting | Yes | Yes |
| Loan ceiling | 100% of value | 100% of value |
Two details matter in that table. First, Type II is not a shortcut. It still needs the net tangible benefit test, and it still carries seasoning when the old loan is VA. Second, recoupment is the Type I-only item. It applies to a VA-to-VA Type I refinance, and it must be met no matter how the new rate or term looks.
How a file moves between types
The comparison is made against the final loan amount. Picture a homeowner whose payoff is right at the new loan size before costs. If the funding fee or other financed costs push the new balance above the payoff, the file becomes a Type II. Remove some of those financed costs, or pay them in cash, and it drops back to Type I. VA’s guaranty system sorts this automatically, so the loan officer sees the type once the numbers are entered.
That is a practical reason to ask early which type your file will land in. The answer tells you which tests and certifications the loan has to clear.
How the Loan Is Underwritten, Step by Step
Underwriting a VA cash-out follows a fixed order, and each step produces a document. Here is the sequence as it runs in practice.
1. Confirm eligibility. The certificate of eligibility from VA decides it. The home must be one the borrower occupies. For an active-duty member, a spouse or dependent can meet that occupancy.
2. Identify the payoff and liens. The lender enters the loan being refinanced and the initial disclosure of the new loan into VA’s system.
3. Deliver the disclosures. The lender must give the borrower the net tangible benefit test, a loan comparison, and an estimate of the home equity being removed. The equity disclosure explains that this may affect a later sale. Per a reproduction of the regulation text, these go out at application and again at closing. Because that source is a third-party copy, treat the timing as a point to confirm in the official text, since it can vary by file and lender.
4. Order the VA appraisal. The appraised reasonable value caps the loan. Under the VA interim final rule, the new loan cannot exceed 100% of that value, and the funding fee can be financed only within that ceiling.
5. Run full underwriting. Across the wholesale programs Lendmire places VA files with, 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. VA sets no minimum credit score, and the wholesale programs used here start at a 580 decision score. Some lenders set a higher floor.
6. Sort into Type I or Type II. Apply seasoning and recoupment to a VA-to-VA Type I. Apply seasoning only to a VA-to-VA Type II.
7. Finish at closing. The final disclosure goes to the borrower, the final cash-out disclosure is uploaded in VA’s system, and the guaranty is requested.
Remember that this is a consumer mortgage, so a Loan Estimate and Closing Disclosure apply like any other home loan.
The Documentation Rules, Piece by Piece
Documentation splits into three buckets: what you provide, what the lender produces, and what proves seasoning. Knowing which bucket a document sits in tells you what to chase and what to leave to the loan team.
What the borrower provides
Expect the usual consumer file: the certificate of eligibility, income documents, asset statements, and current mortgage statements for every loan or lien being paid off. If a second mortgage or a mechanics lien is part of the payoff, the lender will want a statement for that lien too. The Handbook lists second mortgages and mechanics liens among the other liens that can be refinanced.
What the lender and VA file hold
This is the part most competing explainers skip. The VA file also includes a Final Cash-Out Disclosure uploaded under Appraisal Correspondence. It also requires a seasoning certification for every VA-to-VA refinance and a recoupment certification for Type I VA-to-VA refinances. Alongside those sit the loan comparison, the equity disclosure, and the net tangible benefit evidence. Those are lender-side items. A borrower does not prepare them, but should expect to receive and review several of them.
What proves seasoning
Seasoning applies only when the loan being refinanced is a VA loan. Under the Handbook, the first payment due date on that loan must be at least 210 days before the new note date, and six consecutive monthly payments must have been made. Payment history from the servicer is the usual proof.
The Net Tangible Benefit Test
Every VA cash-out must pass the net tangible benefit test, Type I and Type II alike. The lender gives the borrower the test, and the borrower has to meet at least one listed condition. The regulation lists eight. Examples include eliminating monthly mortgage insurance, moving to a shorter term, and reducing the interest rate. VA’s Circular 26-19-05 lays out the framework.
The benefit that fits depends on the scenario. A homeowner paying off an FHA loan may clear the test by removing monthly mortgage insurance. A homeowner moving from a longer to a shorter term may clear it that way. A borrower pulling cash for a project in a Type II still needs one qualifying benefit to be present. Cash alone is not the benefit.
For a VA-to-VA Type I, there is also a rate-reduction requirement set out in the Handbook. The numeric thresholds are best confirmed with the lender against the Handbook text, since they differ by whether the loans are fixed or adjustable.
The Scenario Matrix
The source of the old loan changes which tests apply. This matrix crosses the old loan type with the new loan type.
| Old loan | New loan | Tests that apply |
|---|---|---|
| VA | Type I | NTB, seasoning, recoupment |
| VA | Type II | NTB, seasoning |
| Non-VA | Type I | NTB only |
| Non-VA | Type II | NTB, plus cash-out limits |
When the old loan is FHA, conventional, or another non-VA product, VA’s guide lists a single requirement for a Type I: at least one net tangible benefit. Seasoning and recoupment are VA-to-VA items under the Handbook. That is why a non-VA borrower often finds the Type I paperwork lighter than a VA borrower does.
Where the Rules Break: Edge Cases
A few situations catch borrowers off guard, and each one changes the file.
- A Type I can mean no cash. It is filed as a cash-out even though the borrower may receive nothing back.
- A streamline cannot pull equity. A streamline (IRRRL) refinances an existing VA loan to a lower rate or from adjustable to fixed. It cannot pay off other debts or take cash from equity. Across the VA programs Lendmire arranges, the streamline carries a 0.5% funding fee unless exempt, with seasoning of the later of 210 days from the first payment or the 6th payment.
- No existing lien, no cash-out. A paid-off home does not qualify for this guaranty.
- Regulation text trails statute. One compliance site notes that the regulation text does not yet reflect the 210-day and 36-month tests that the statute (38 USC 3709) requires. That is why the Handbook is the practical reference.
- State limits can apply. Some states restrict how much equity you can pull. This varies, so ask the loan officer.
- Lender overlays. The federal ceiling is 100% of reasonable value. An individual lender may set a lower one.
What a Cash-Out Costs: The Funding Fee
The VA funding fee on a cash-out refinance is 2.15% for first use and 3.3% for subsequent use, as VA lists on its funding fee page. Unlike purchase loans, it does not change with the down payment on a refinance. The fee can be financed, which is exactly why it can tip a file from Type I to Type II. Veterans receiving compensation for a service-connected disability, and other exempt groups, owe no funding fee. VA mortgage loans carry no monthly mortgage insurance of any kind.
How to Decide in Practice
A borrower’s decision usually comes down to what the loan is for, and the type follows from that.
- You want a lower payment structure or shorter term and no cash: a Type I is the likely fit, and a streamline may be simpler if the current loan is already VA.
- You are moving an FHA or conventional loan into VA: a Type I with a net tangible benefit is often the path, since seasoning and recoupment do not apply to non-VA payoffs.
- You want equity for a project or to consolidate debt: that is a Type II. Weigh the larger balance and the equity disclosure, since less equity may affect a later sale.
Compare costs like for like. The CFPB found that NewDay USA gave misleading comparisons by listing only principal and interest on the new loan while showing principal, interest, taxes, and insurance on the old one. Ask for both loans on the same basis.
Common ways a Type I file stalls
Most problems trace to a few causes: seasoning not yet met on the VA loan being paid off, no qualifying net tangible benefit, financed costs pushing the loan above the payoff, or a missing payoff statement for a second lien. The fixes follow the cause. Wait out seasoning, change the structure to meet a benefit, trim financed costs, or move to a Type II or a streamline if that fits the goal better.
Frequently Asked Questions
Do I need to already have a VA loan to do a Type I?
No. A non-VA loan can be refinanced into a VA loan. For a Type I from a non-VA loan, VA’s guide lists one requirement: at least one net tangible benefit. Seasoning and recoupment apply only when the loan being paid off is VA.
Do I get any cash with a Type I?
Possibly none. A Type I keeps the new loan at or below the payoff, so the loan is classed as cash-out without necessarily putting money in your pocket. If you want equity in hand, that is a Type II.
Can the funding fee change my type?
Yes. The comparison uses the new loan amount including a financed funding fee. If financing the fee pushes the new balance over the payoff, the file becomes a Type II. Paying costs in cash can keep it at Type I.
What if my lender cannot get a standard payment verification for seasoning?
Seasoning is measured from the first payment due date and the count of consecutive payments made. If the usual verification is missing, the lender decides what alternate proof it will accept, so ask early.
Does VA cap cash-out at a lower percentage than 100%?
The federal ceiling is 100% of reasonable value, financed fee included. Individual lenders may set a lower cap, and some states limit equity withdrawal, so the practical limit can be below that.
If You’re Weighing Your Options
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. All program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
2. Federal Register interim final rule (38 CFR 36.4306)
4. VA 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: How a Lender Sizes a VA Cash-Out Refinance Type I or Type II · VA Cash-Out Refinance Requirements Versus a VA Streamline · How to Meet VA Cash-Out Refinance Seasoning Before You Apply
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.