VA Cash-Out Refinance: Type I and Type II Rules, LTV and Funding Fee

Published by the Modern Lending Solutions editorial team. Last reviewed: October 30, 2026.

Short answer: a VA cash-out refinance replaces a mortgage or other lien on the home you live in with a new VA-guaranteed loan. It can refinance a VA loan or a non-VA loan, and it can let you take equity out as cash. The new loan, with the funding fee, cannot be more than 100 percent of the reasonable value VA sets through an appraisal. The lender must give you a net tangible benefit test and two loan comparison disclosures, and when a VA loan is refinanced, that loan must first be seasoned. This page covers federal rules only. It is general information, not legal or financial advice.

What it is and who can get one

The law lets VA guarantee a loan to refinance existing mortgage loans or other liens of record on a dwelling or farm residence that the veteran owns and occupies as a home (38 U.S.C. 3710(a)(5), LII, read October 30, 2026). VA’s page says you may be eligible if you qualify for a Certificate of Eligibility, meet VA’s and the lender’s credit, income and other standards, and will live in the home (VA, last updated January 7, 2026, read October 30, 2026). It also says you go through a private lender, not VA, and that the lender will order an appraisal. See VA loan entitlement for how much entitlement the loan uses.

VA’s Lenders Handbook says a property with no existing mortgage or lien of record is not eligible, the lien being paid off does not have to be in your name if you are an owner at closing, the new loan must be in first lien position, full credit underwriting is always required, and VA sets no limit on how you use the cash (Chapter 6, Topic 3, VA, chapter updated July 9, 2026; Topic 3 change date October 30, 2024; read October 30, 2026).

Type I and Type II

Item	Type I	Type II
New loan amount, with the funding fee	Not more than the payoff of the loan being refinanced	More than the payoff; you can take equity out
Net tangible benefit test and loan comparison disclosures	Yes	Yes
Seasoning (only when a VA loan is refinanced)	First payment due date 210 days or more before the new note date, and six consecutive monthly payments made	First payment made 210 days or more before closing, and six monthly payments made (not consecutive)
36-month fee recoupment (VA loan refinanced)	Yes	No; costs are deemed recouped if 36.4306(a) is met
Lower rate required (VA fixed-rate loan refinanced)	At least 0.50 point lower for fixed to fixed; at least 2 points lower for fixed to adjustable	No

Sources: Chapter 6, Topic 3, sections b, c and m to p; 38 CFR 36.4306(b) and (c) (eCFR, text up to date as of October 28, 2026). The statute sets the recoupment, rate and seasoning rules for VA refinances in 38 U.S.C. 3709(a) to (c) and says they do not apply when the new principal is larger than the payoff; for those loans it told VA to write its own rules on recoupment, seasoning and net tangible benefits (3709(d), LII). The Handbook says that for a Type I loan with a higher principal and interest payment, the lender may not charge you fees or closing costs other than taxes, escrow amounts and the funding fee.

The net tangible benefit test

For every VA cash-out refinance, the new loan must be in your financial interest and meet at least one of these (38 CFR 36.4306(a)(3)(i)):

it ends monthly mortgage insurance or monthly guaranty insurance;
its term is shorter than the term of the loan being refinanced;
its interest rate is lower;
its payment is lower;
it raises your monthly residual income as VA measures it;
it refinances an interim loan to build, alter or repair your home;
the new loan is 90 percent or less of the reasonable value; or
it refinances an adjustable-rate loan into a fixed-rate loan.

The lender must compare the old and new loans for payoff amount, loan type, rate, term, total of scheduled payments and loan-to-value ratio, estimate the dollar amount of home equity being removed, and explain that this may affect your ability to sell later. You get this in a standard format within 3 business days of application and again at closing, and you certify that you received it both times (36.4306(a)(3)(ii) to (iv)).

Loan limit and funding fee

The new loan cannot be more than 100 percent of the reasonable value VA determines. The funding fee may be added to the loan, but any part that would push the loan above 100 percent must be paid in cash at closing (38 CFR 36.4306(a)(1) and (2)). The Handbook adds that for a Type I loan from a fixed rate to an adjustable rate with more than one discount point, the loan is limited to 90 percent of the reasonable value. For a cash-out refinance closed on or after April 7, 2023 and before June 9, 2034, the statute’s fee table sets the funding fee at 2.15 percent for a first use and 3.30 percent for a later use (38 U.S.C. 3729(b)(2), rows (A)(iii) and (B)(iii), LII). Some borrowers are exempt; see the VA home loan funding fee and VA’s funding fee page. VA’s Chapter 8 says that on a cash-out refinance, allowable fees, charges and discount points may be paid from the cash proceeds, and only the funding fee (and energy efficiency improvements) can be added to raise the loan amount (VA).

Example: a Type II cash-out

This example is only for the math, with example figures, not terms from any lender. It assumes a first use of the VA benefit and no exemption from the funding fee.

Item	Amount
Reasonable value from the VA appraisal (example)	$400,000
Payoff of the current loan (example)	$250,000 (62.5% of value)
New base loan (example)	$300,000
Funding fee: $300,000 × 2.15%	$6,450
Total loan with the fee financed: $300,000 + $6,450	$306,450
Loan-to-value: $306,450 ÷ $400,000	76.6%
Cash before closing costs: $300,000 − $250,000	$50,000
Equity before: $400,000 − $250,000	$150,000
Equity after: $400,000 − $306,450	$93,550
Equity removed: $150,000 − $93,550	$56,450

Here the new loan is more than the payoff, so it is Type II, and at 76.6% it meets the 90 percent benefit in the list above. On a later use, the fee would be $300,000 × 3.30% = $9,900. If the base loan were the full $400,000, the 2.15% fee of $8,600 could not be added, because the loan would go above 100 percent; it would have to be paid in cash at closing. Closing costs paid from the proceeds lower the cash you receive.

A note on the regulation’s seasoning text

A 2019 law changed the statute’s seasoning rule to six consecutive monthly payments and 210 days after the first payment due date (38 U.S.C. 3709(c), as amended July 25, 2019). The regulation was last amended in December 2018 and still says 210 days from the first monthly payment made and the date the sixth monthly payment is made (38 CFR 36.4306(b)(2) and (c)(2)). VA’s Handbook uses the 2019 wording for Type I and the regulation’s wording for Type II. Ask the lender which test it applied and the date your loan is seasoned.

Cash-out refinance or IRRRL

Item	Cash-out refinance	IRRRL
Loan being refinanced	Any mortgage or lien of record, VA or not	A VA-guaranteed loan only
Cash to you	Possible (Type II)	No
Appraisal	Required	Not required
Credit underwriting	Always required	Not required except in some cases
Funding fee (statute table)	2.15% first use, 3.30% later use	0.50%
Law	38 U.S.C. 3710(a)(5)	38 U.S.C. 3710(a)(8)

Source: Chapter 6, Topic 4, and 38 U.S.C. 3729(b)(2). See the VA streamline refinance (IRRRL) and VA’s IRRRL page.

Your right to cancel

A refinance secured by your principal dwelling can carry a 3 business day right to cancel; a refinance by the same creditor is covered only for new money above the existing balance and costs (12 CFR 1026.23(a) and (f)(2), eCFR). See the right to cancel a home equity loan.

Questions to ask the lender

Is this a Type I or Type II cash-out refinance, and why?
Which net tangible benefit does the loan meet, and when will I get the two loan comparison disclosures?
If my current loan is a VA loan, on what date is it seasoned?
What is the funding fee, am I exempt, and will any of it have to be paid in cash?
How much home equity will this remove, and what cash will I get after closing costs?
Would an IRRRL or another option cost less for what I need?

Checklist

Get your Certificate of Eligibility.
Compare the initial and final loan comparison disclosures with your Loan Estimate and Closing Disclosure.
Check the appraised value and the loan-to-value ratio.
Note the equity removed and the total of payments on the new loan.
Be careful with refinance offers that promise skipped payments or rates that sound too good; VA warns about them.
Mark the last day to cancel if a right to cancel applies.

For other ways to borrow against or around your equity, see cash-out refinance vs a personal loan. To find housing counseling agencies that HUD has vetted, use the CFPB housing counselor search. You can submit a complaint at consumerfinance.gov/complaint.

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Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.

VA Cash-Out Refinance Loans: How the Rules Work