VA Cash-Out Refinance: The Rules Most Lenders Get Wrong

You own a home. You have equity. You want cash. A VA cash-out refinance lets you borrow up to 100% of what your home is worth. Not 80%. Not 90%. That is the rule from VA. But a lot of lenders add their own limits on top. This post lays out the real VA rules so you know what is true before you talk to anyone.

What a VA Cash-Out Refinance Is

It is a new VA loan that pays off a loan you already have on your home. The old loan can be any kind. VA, FHA, USDA, or a regular loan. It can also pay off a second mortgage, a tax lien, or a lien from a contractor. Any cash left over goes to you.

You must already have a loan or lien on the home. If your home is paid off with no lien at all, VA will not back a cash-out loan on it. That is a VA rule, not a lender rule.

You can use the cash for anything. VA does not ask why. You do not have to write a letter to explain it.

How Much You Can Borrow

Up to 100% of the home’s value as set by the VA appraisal. That number includes the VA funding fee if you roll it into the loan. So if the home is worth $400,000, your total new loan, with the fee, cannot pass $400,000.

One exception: if you are moving from a fixed-rate loan to an adjustable-rate loan and paying more than one discount point, the cap drops to 90%.

Type I and Type II: Why It Matters

VA splits cash-out loans into two types. The type sets which extra rules apply.

• Type I. Your new loan, with the funding fee, is not bigger than what you owe now. You are not taking equity out. Think of it as a rate-and-term refinance done through the cash-out program.
• Type II. Your new loan, with the funding fee, is bigger than what you owe now. You are pulling equity out as cash. This is what most people mean by cash-out.

If you are paying off a VA loan with a Type I loan, two extra rules kick in. Your closing costs must pay for themselves through a lower payment within 36 months. And if both loans are fixed-rate, the new rate must be at least 0.5% lower. Neither rule applies to a Type II loan.

The Net Tangible Benefit Test

Every VA cash-out loan must give you a real benefit. VA lists eight ways to pass. You only need one:

1. The new loan gets rid of monthly mortgage insurance (this includes the USDA annual fee).
2. The new loan has a shorter term.
3. The new rate is lower.
4. The new loan is 90% or less of the home’s value.
5. The new principal and interest payment is lower.
6. Your residual income goes up.
7. The loan pays off a construction loan on your main home.
8. You move from an adjustable rate to a fixed rate.

Your lender must show you this test in writing. You will also get a side-by-side of your old loan and new loan, and a page that shows how much equity you are taking out. You get these within three business days of applying and again at closing.

Seasoning: The Waiting Period

If you are paying off a VA loan, the old loan must be seasoned first. That means 210 days have passed since your first payment was due, and you have made six monthly payments. For a Type I loan the six payments must be in a row. Your new note date has to fall on or after the later of those two dates.

VA says this rule only applies when the loan you are paying off is a VA loan. But a separate rule from Ginnie Mae applies the same waiting period to FHA, USDA, and regular loans too. Every lender has to follow it. Here is how to find your own date.

The Funding Fee

VA charges a one-time funding fee on a cash-out loan. It is 2.15% of the loan if this is your first VA loan. It is 3.3% if you have used your VA benefit before. You can roll it into the loan. If you get VA disability pay, you do not pay it at all. Full funding fee details here.

Other Rules to Know

• Full underwriting. A cash-out loan is not a streamline. Credit, income, and residual income all get checked. We do manual underwriting when the automated system says no.
• You must live in the home. VA occupancy rules apply. A rental you do not live in does not qualify.
• You must be on title. The old loan does not have to be in your name. Your spouse’s loan works. But you must own the home by closing. There is no minimum time you have to have owned it.
• The new loan must be in first position. Any other lien holder has to agree to sit behind the VA loan.
• Max term is 30 years. VA allows up to 30 years and 32 days.
• Your entitlement gets restored. If you are paying off a VA loan on the same home, the entitlement tied to that loan comes back for the new loan. More on entitlement here.

When a Cash-Out Is Not the Best Move

If your current rate is low, a cash-out refinance replaces it with today’s rate on the whole balance. That can cost more than the cash is worth. A closed-end second mortgage or a HELOC sits behind your first loan and leaves that rate alone. Here is how to compare the two. We run both and show you the numbers.

And if you just want a lower rate or payment on a VA loan you already have, with no cash out, a VA IRRRL is faster and needs no appraisal.

Sources: VA Lender’s Handbook M26-7, Chapter 6, Topic 3 (Cash-Out Refinancing Loans, change date October 30, 2024). VA Circular 26-18-30. 38 CFR 36.4306. VA funding fee rates from va.gov, effective April 7, 2023.

Frequently Asked Questions