A VA cash-out refinance gets classified as Type I when the new loan amount, including any financed VA funding fee, lands at or below the payoff balance of the loan being retired. It becomes Type II when the new loan amount exceeds that payoff. Both categories have to pass the eight-point Net Tangible Benefit test defined under VA Circular 26-19-5, but Type I carries two extra hurdles that Type II doesn’t: a 36-month fee recoupment ceiling and a minimum rate reduction of 50 basis points on fixed-to-fixed refinances or 200 basis points on fixed-to-ARM transactions (38 CFR 36.4306).
The short answer: Type I vs Type II in one paragraph
Type I covers VA cash-out transactions where the veteran takes no cash home. Converting an FHA or conventional loan into a VA loan at the same payoff balance is the most common Type I scenario. Type II is the traditional cash-out, where the new principal exceeds the payoff and the borrower pockets the difference. Both require passing one of the eight NTB criteria. But only Type I is subject to recoupment math and rate-reduction floors.
Which type is your VA cash-out refinance?
The classification follows one arithmetic test: compare the new loan amount, including the financed funding fee, against the payoff balance of the loan being refinanced.
New loan at or below payoff: Type I
A veteran refinancing a $280,000 FHA mortgage into a $280,000 VA loan with the funding fee paid in cash at closing is in Type I territory. No equity leaves the house.
New loan above payoff: Type II
A $280,000 payoff refinanced into a $320,000 VA note, with roughly $40,000 wired to the borrower after costs, is Type II. The 100% LTV cap, the eight-point NTB test and the Loan Comparison Disclosure still apply.
How the financed funding fee flips Type I into Type II
Veterans sometimes assume no cash at closing automatically means Type I. But the funding fee is the trap. A $300,000 payoff plus a financed subsequent-use funding fee of $9,900 produces a new loan of $309,900, which exceeds the payoff. And VA treats that as Type II even when the borrower receives nothing. Paying the fee in cash restores Type I classification.
Converting FHA or conventional to VA
An FHA-to-VA or conventional-to-VA conversion is almost always Type I when the funding fee is paid out of pocket or absorbed by lender credits. If you’re evaluating this path, our guide to a VA cash-out refinance from a conventional loan walks through the eligibility pivot in depth.
Type I cash-out requirements in 2026
The 36-month fee recoupment rule
For Type I, all recoupable closing costs have to be recovered through monthly P&I savings within 36 months of the note date. Total recoupable fees divided by the monthly P&I reduction must equal 36 or fewer. A loan with $5,000 in recoupable closing costs and a $150 monthly P&I drop recoups in 33.3 months and passes. The same costs against a $120 monthly reduction recoup in 41.7 months and fail. This parallels the VA IRRRL 36-month recoupment rule, but the included cost categories differ, so IRRRL exclusions shouldn’t be assumed.
Minimum rate reduction: 50 bps fixed, 200 bps ARM
Fixed-to-fixed Type I refinances need at least a 50 basis-point reduction in the note rate. Fixed-to-ARM refinances need at least 200 basis points. A move from 6.50% fixed to 6.00% fixed meets the Type I threshold and passes. But a move from 6.50% to 6.25% is only 25 basis points and fails, regardless of monthly savings. Rate figures here are illustrative; current market rates fluctuate.
Which fees count toward Type I recoupment
VA Circular 26-19-5 and the Lender’s Handbook M26-7 Chapter 6 Topic 3 govern inclusion. Discount points, origination fees, title charges and recording costs are generally recoupable. Prepaid escrows for taxes and insurance (property taxes, homeowner’s insurance, flood insurance where applicable) are generally excluded. Lenders apply slight interpretive differences in practice – the kind of thing you only notice when two shops hand you different recoupment worksheets for the same file – so get a written recoupment worksheet from the lender before you sign anything, not after conditions come back.
Type II cash-out requirements in 2026
NTB only, no recoupment or rate-reduction floor
Type II is governed by the eight-point NTB test, the 100% LTV cap and seasoning when the payoff is an existing VA loan. The 36-month recoupment rule and the 50 or 200 basis-point rate-reduction thresholds don’t apply, per VA Circular 26-19-5. Some lender blogs state otherwise. But the authoritative read of the circular is that both constraints are Type I only.
Worked example: Type II with no rate change
A veteran holding a 5.75% VA loan with a $240,000 balance refinances into a new 5.75% VA loan at $290,000, taking $50,000 for a kitchen remodel. The rate is identical, so NTB criterion three (lower rate) fails. If the new LTV lands at 88%, criterion seven (LTV at or below 90%) passes and the loan qualifies. The lender records the passing criterion on the Loan Comparison Disclosure.
Why Type II still has underwriting discipline
Even without a rate floor, Type II loans get stress-tested against VA residual income tables, DTI thresholds and the 100% LTV cap. The absence of a recoupment formula doesn’t loosen the rest of the file.
The eight-point net tangible benefit test
At least one of the following has to be checked YES on the Loan Comparison Disclosure for either Type I or Type II to proceed (VA Circular 26-19-5, Exhibit A):
- The new loan eliminates monthly mortgage insurance that applied to the prior loan.
- The new loan term is shorter than the prior loan term.
- The new interest rate is lower than the prior rate.
- The new monthly principal and interest payment is lower.
- The borrower’s monthly residual income increases, measured against current VA residual tables.
- The new loan pays off a construction loan.
- The new loan’s LTV is 90% or less.
- The new loan refinances an ARM into a fixed-rate loan, which also carries the ARM-to-fixed VA refinance net tangible benefit framework used in IRRRL analysis.
The exact wording in M26-7 Chapter 6 Topic 3 is binding. Secondary sources paraphrase.
Shared rules that apply to both types
100% LTV cap including the financed funding fee
LTV is capped at 100% of reasonable value, inclusive of any financed funding fee (VA Circular 26-18-30). Any portion of the fee that would push LTV past 100% has to be paid in cash at closing. Lender overlays sometimes cap LTV lower, often at 90%. Worth knowing: overlays are lender policy, not VA policy.
Seasoning: 210 days and six payments
When the loan being refinanced is a VA loan, VA requires at least 210 days from the first payment due date of the existing loan to the new note date, along with at least six monthly payments made (M26-7 Chapter 6 Topic 3). The sixth payment can’t be made at closing. Non-VA payoffs aren’t subject to this specific VA rule, though lender overlays often impose a similar requirement.
Loan Comparison and Home Equity Disclosures
Both disclosures have to be delivered within three business days of application and again at closing. The borrower certifies both. The Home Equity Disclosure quantifies equity extracted. Compare the initial and final versions line by line.
VA funding fee treatment
The funding fee can be financed within the 100% LTV cap. Fee amounts in 2026 vary by first-time versus subsequent use and exempt status. Check the current VA funding fee chart at va.gov before signing.
Type I vs Type II side-by-side
| Attribute | Type I | Type II |
|---|---|---|
| New loan vs payoff | At or below | Above |
| Cash to borrower | None or de minimis | Yes |
| NTB test | One of 8 required | One of 8 required |
| 36-month recoupment | Required | Not required |
| Rate reduction minimum | 50 bps fixed, 200 bps ARM | Not required |
| 100% LTV cap | Yes | Yes |
| Seasoning (prior VA loan) | 210 days, 6 payments | 210 days, 6 payments |
| Disclosures | Comparison + Home Equity | Comparison + Home Equity |
Edge cases that trip up veterans and loan officers
A financed funding fee crossing the 100% LTV line forces either a cash payment at closing or a reduction in the cash-out amount. Lender overlays below 90% LTV can block an otherwise-eligible Type II. And Texas properties fall under Section 50(a)(6) of the state constitution, which layers its own home-equity rules (a 2% fee cap, specific waiting periods) on top of the VA requirements.
How Type I compares to a VA IRRRL
An IRRRL is a VA-to-VA streamline. It can’t pay off a non-VA loan, can’t deliver cash to the borrower and uses thinner documentation. Type I cash-out, by contrast, can convert a non-VA loan to VA and permits a wider cost structure, which is why it carries the recoupment and rate-reduction gates.
How VA cash-out compares to a conventional cash-out
Conventional cash-out typically caps LTV at 80% on a primary residence, carries no funding fee, requires PMI only when LTV exceeds 80% and has no VA-style NTB test. For the full comparison, see our conventional cash-out refinance rules.
What to review at closing
Here’s the practical reality: confirm the Loan Comparison Disclosure matches the initial version, verify the NTB box the lender ticked, read the Home Equity Disclosure and confirm the recoupment worksheet if the loan is Type I. The sixth payment on the prior loan should already be posted.
Frequently asked questions
What is the difference between a VA Type I and Type II cash-out refinance? Type I’s new loan amount, including any financed funding fee, is at or below the payoff of the loan being retired. Type II exceeds that payoff and delivers cash to the borrower.
Does the 36-month recoupment rule apply to Type II VA cash-out loans? No. Under VA Circular 26-19-5, the 36-month fee recoupment requirement is Type I only.
What is the minimum rate reduction for a VA Type I cash-out refinance? 50 basis points on fixed-to-fixed refinances and 200 basis points on fixed-to-ARM refinances.
Can I use a VA cash-out refinance to pay off a conventional or FHA loan? Yes. Converting non-VA debt into a VA loan is a standard use of the program and is usually a Type I when no cash is drawn.
What is the maximum LTV on a VA cash-out refinance in 2026? 100% of reasonable value, inclusive of any financed funding fee.
Does VA cash-out seasoning apply if I am refinancing a non-VA loan? The VA 210-day and six-payment seasoning rule applies only when the loan being refinanced is already a VA loan.
Can a financed VA funding fee turn a Type I into a Type II cash-out? Yes. If financing the fee pushes the new loan above the payoff balance, VA classifies the transaction as Type II even when no cash reaches the borrower.
Is a VA Type I cash-out the same as an IRRRL? No. An IRRRL is a VA-to-VA streamline that can’t pay off a non-VA loan or deliver cash. Type I can convert a non-VA loan to VA.
Sources and regulatory references
- VA Circular 26-19-5 (NTB test, Type I vs Type II classification)
- 38 CFR 36.4306 (rate reduction and recoupment)
- VA Lender’s Handbook M26-7, Chapter 6 Topic 3 (seasoning, fee treatment)
- VA Circular 26-18-30 (100% LTV cap, financed funding fee)
Accurate as of October 28, 2026. VA regulations may change; verify with your lender and the current VA Lender’s Handbook (M26-7).
