VA Cash-Out vs FHA Cash-Out for a Veteran Financing Closing Costs

The Quick Read: A veteran with an eligibility certificate and limited cash usually gets more room from a VA cash-out. VA allows far higher leverage and carries no monthly mortgage insurance. FHA cash-out stops at 80% of the home’s value, so it fits better when the veteran has deep equity, a lower balance to cover, or a file the VA route does not suit. Both loans can roll closing costs into the balance. Either way, every dollar financed is a dollar you do not take home.

How Each Loan Works

A cash-out refinance replaces your current mortgage with a bigger one. You pay off the old loan, and the difference comes to you as cash, minus costs. The two programs differ in who backs the loan, how much equity you must leave behind, and what you pay for the backing.

VA cash-out is a loan guaranteed by the Department of Veterans Affairs and made by a private lender. VA’s own cash-out page says you need a Certificate of Eligibility and must live in the home. It also says the loan can refinance a non-VA mortgage into a VA-backed one. That matters if your current loan is FHA or conventional.

FHA cash-out is insured by the Federal Housing Administration. The new loan reaches 80% of the home’s value, and you must have owned and lived in the home for 12 months before the case number is pulled. Those figures reflect the wholesale programs Lendmire places files with, subject to lender guidelines and full file review.

The 80% cap is newer than many borrowers realize. HUD Mortgagee Letter 2019-11 lowered the cash-out maximum from the older 85% limit. Old blog posts that quote 85% or 95% are out of date.

Side-by-Side

Two rows deserve a closer look. VA’s leverage looks generous, but the net tangible benefit test shapes what a lender can do. FHA’s annual premium is a range because it depends on the term, the loan amount and the LTV (loan-to-value ratio, the loan as a share of the home’s value). On a thirty-year FHA loan, the annual premium lasts the full term when LTV is high. When LTV is lower, it ends after eleven years. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.

What Financing Closing Costs Really Does

Financing closing costs means adding them to the new loan balance instead of paying them at the table. It helps if you are short on cash. It also means you borrow the costs and carry them for the life of the loan.

Consider a modeled scenario in words, with no dollar figures. Say a veteran owns a home with a current payoff equal to 60% of its appraised value. The closing costs come to some share of the new loan, and the veteran wants as much cash as possible.

On the FHA route, the new loan cannot pass 80% of the value. That leaves 20% of value as the starting room. The financed closing costs come out of that 20% first. The 1.75% upfront premium is financed on top of the base loan, so it adds to the balance you owe. Whatever remains is your cash.

On the VA route, the same home has much more room on paper. The financed costs and the VA funding fee still reduce your cash, but they take a smaller bite out of a larger pool. The tradeoff is the net tangible benefit test, covered below. VA also expects the new loan to leave the veteran better off, not merely holding more debt.

The pattern holds across both programs. More equity left in the home means a smaller balance and less to carry. More cash taken out means a bigger balance. Financing the costs is a convenience with a price, and the price is a larger loan.

When VA Cash-Out Is the Better Fit

VA cash-out wins for a veteran who has the eligibility, wants the most cash left after costs, and wants to avoid monthly mortgage insurance. Several situations point that way.

You have thin cash and thick need. If you want to roll costs into the loan and still receive meaningful proceeds, VA’s higher ceiling gives you room that FHA’s 80% cap does not. A veteran in this spot may find the FHA cap is the limit that binds first.

You are paying monthly mortgage insurance on an FHA loan. A VA cash-out can refinance a non-VA loan into a VA-backed one, per VA’s cash-out page. That page also says the VA program does not require monthly mortgage insurance. Swapping a monthly premium for a one-time funding fee can change the long-run picture. Whether it saves money depends on the loan amount, the fee and how long you keep the loan.

You may qualify for a funding-fee exemption. Veterans who receive service-connected disability compensation, and certain surviving spouses, can be exempt from the VA funding fee. Confirm your status. The exemption can tilt the comparison toward VA by a wide margin.

You want to stay at a higher loan amount. Keeping the loan balance close to the home’s full value is a VA feature. It also raises risk, which is why VA built in protections.

Those protections are real. VA’s lender conference materials list the requirements. A cash-out must meet the net tangible benefit tests. Seasoning, a waiting period tied to the prior VA loan, may apply. Recoupment, meaning earning back the fees and charges of the refinance within 36 months, is required for a Type I cash-out. A Type I loan has a new principal at or below the old payoff.

The Federal Register rule behind these tests treats net tangible benefit as pass-or-fail. A lender reviews each file against the rule.

What can go wrong: VA cash-out is a fully underwritten loan, not a streamline. The Interest Rate Reduction Refinance Loan, or IRRRL, is a separate VA product. It is available only when you already have a VA loan on the property, and it does not pay out cash. Lendmire’s piece Type I VA Cash-Out vs IRRRL for a Veteran Rolling In Closing Costs walks through that choice. Credit, income and residual income all get reviewed, and lenders may set standards stricter than VA’s minimums.

When FHA Cash-Out Is the Better Fit

FHA cash-out fits a veteran who lacks a usable VA path, has plenty of equity, or needs ratio flexibility. It is a less glamorous loan with a more predictable shape.

You have deep equity and need moderate cash. If your payoff is well under 80% of value, FHA’s cap does not squeeze you. You can borrow what you need, finance the costs, and still keep at least 20% equity. In that case VA’s higher ceiling adds little.

You do not have, or do not want to use, VA eligibility. Some veterans lack a certificate on file. Others want to keep VA entitlement for a later purchase. FHA does not touch it. A veteran who plans to buy again with a VA loan has a real reason to leave that benefit alone.

Your ratios need documented compensating factors. FHA’s base pair is 31/43, housing to total debt as a share of income. With documented compensating factors, the top tier reaches 40/50, and the automated finding governs most files. A veteran with higher debts and strong reserves or stable income may find FHA’s structure more forgiving than a VA lender’s residual-income review. Programs and lenders differ, so this is a file-by-file call.

Your credit is in the 580 range. The wholesale programs Lendmire places FHA loans with start at a 580 decision score. HUD has a lower tier, but that is a HUD rule these programs do not reach below 580. VA lenders set their own floors, and some set higher ones.

What can go wrong: the 12-month ownership and occupancy test is firm on FHA. If you bought recently, FHA cash-out is not available. The annual premium also adds to the monthly cost, and on a loan at higher leverage it can last the full term. Credit events carry HUD’s waiting periods: two years from a chapter 7 discharge and three years from a foreclosure. Those are HUD rules, not a promise from any lender. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.

County loan limits apply to FHA loans and change each year. Check the current limit for your county before you plan around a large balance.

Key Terms Defined

Cash-out refinance: a new, larger mortgage that pays off the old one and gives you the difference in cash.

Closing costs: the one-time fees to set up the loan, such as the appraisal, title work and lender charges.

Financing closing costs: adding those fees to the new loan balance instead of paying them out of pocket.

VA funding fee: a one-time charge on a VA loan that helps fund the program. Exemptions exist for some veterans.

FHA mortgage insurance premium: an upfront charge of 1.75% of the base loan, plus an annual premium that is paid monthly.

Net tangible benefit: VA’s test that a refinance must leave the veteran measurably better off, not just with a new loan.

Recoupment: earning back the fees and charges of the refinance through savings, within 36 months for a Type I VA cash-out, per VA’s lender materials.

Certificate of Eligibility: the document that proves your VA loan eligibility.

Watch the “No Out-of-Pocket” Pitch

Veterans get heavy refinance marketing, and a rolled-in cost can look like a free one. It is not. The costs are built into the balance you owe.

The CFPB and VA issued a joint warning on VA refinance solicitations. It says some offers give limited benefit while adding thousands of dollars to the loan balance. It also flags repeated refinancing, called churning, where each new loan adds costs without much gain.

The practical defense is a side-by-side. Ask each lender for a Loan Estimate for the same loan amount and compare the full terms: the closing costs, the funding fee or insurance premium, the cash you receive and the balance you will owe. Run the VA and FHA versions together before you commit to either.

The Balanced Verdict

Neither loan wins by default. The decision turns on four things: whether you hold a Certificate of Eligibility, how much equity you have, what your current mortgage is, and whether you qualify for a fee exemption.

Lean toward VA if you want the most cash after financing costs, you are in or near an FHA loan with monthly insurance, or your fee is waived. Lean toward FHA if your equity is deep, your VA path is blocked or reserved for later, or your ratios need the flexibility FHA’s compensating factors allow. For a home you plan to keep for many years, the monthly insurance difference may outweigh the leverage difference. For a shorter hold, it may not. It is a genuine toss-up on some files.

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.

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.

References

1. VA: Cash-out refinance loan

2. HUD Mortgagee Letter 2019-11: Cash-out Refinance Mortgages

3. VA Loan Guaranty Conference: Refinancing Loans

4. Federal Register: VA Revisions to Cash-Out Refinance Loans (interim final rule)

5. CFPB and VA warning on VA refinancing offers