The Only Way a Conventional Mortgage Becomes a Veterans Affairs Loan
6 min read · Last updated August 22, 2026
- A Department of Veterans Affairs (VA) cash-out refinance funding fee runs 2.15% on first use and 3.3% on later use, compared to a flat 0.5% for a VA Interest Rate Reduction Refinancing Loan (IRRRL).
- VA allows a cash-out refinance up to 100% of the home’s appraised value, far looser than the roughly 80% ceiling on most conventional cash-out refinances.
- A cash-out refinance is the only VA loan type that can convert a non-VA mortgage, conventional or Federal Housing Administration (FHA), into a VA-backed loan.
- A veteran receiving VA compensation for a service-connected disability is exempt from the funding fee on a cash-out refinance the same as on a purchase loan.
In this article
- What a VA cash-out refinance is
- The funding fee gap versus IRRRL
- Loan-to-value limits
- A worked example
- What causes a cash-out refinance to go badly
- Frequently asked questions
Anthony Grasso, a veteran with a $200,000 balance on a conventional mortgage against a home appraised at $280,000, wanted to move into a loan backed by the Department of Veterans Affairs (VA) and pull out equity for a home repair at the same time. An Interest Rate Reduction Refinancing Loan (IRRRL) could not do either of those things, since an IRRRL only refinances an existing VA loan into a new VA loan. A VA cash-out refinance is the tool built for exactly this situation, and it is also the only door that leads a non-VA loan into the VA program at all.
What a VA cash-out refinance is
A cash-out refinance replaces an existing mortgage, VA-backed or not, with a new VA-backed loan, either to take equity out in cash or simply to move a non-VA loan into VA’s program. VA’s own regulations classify cash-out refinances by how the new loan amount compares to what is owed on the loan being replaced: one category keeps the new loan amount at or below the existing payoff, and the other category increases the loan amount above that payoff to generate cash for the borrower. Either way, this is a fundamentally different product from an IRRRL, which exists solely to lower the rate on a loan that is already VA-backed.
That distinction matters because the two categories are underwritten and disclosed differently, even though a veteran shopping for a refinance may not see the internal label at all. A veteran simply moving a non-VA loan into a VA loan at the same or a lower balance still falls into the category that does not put new cash in the veteran’s pocket, and it still carries the higher cash-out-style funding fee described below, not the IRRRL rate, because the loan being paid off was never VA-backed to begin with.
The funding fee gap versus IRRRL
| Refinance type | First use | Later use |
|---|---|---|
| VA cash-out refinance | 2.15% | 3.3% |
| VA Interest Rate Reduction Refinancing Loan (IRRRL) | 0.5% | 0.5% |
The gap is not incremental. A first-time cash-out refinance costs 2.15%, more than four times the flat 0.5% IRRRL fee. A veteran refinancing this way a second time pays 3.3%, more than six and a half times the IRRRL rate. Most veterans searching for a VA refinance do not realize these are priced as two structurally different products, not two versions of the same one.
Loan-to-value limits
VA guarantees a cash-out refinance up to 100% of the home’s appraised value, a far looser ceiling than the roughly 80% cap most conventional and FHA cash-out refinances carry. A separate 90% loan-to-value threshold shows up in VA’s underwriting rules too, but it is not a hard ceiling. It is one of several ways a loan can satisfy VA’s net tangible benefit requirement, a rule designed to confirm the refinance genuinely helps the veteran, alongside alternatives like a lower interest rate, a lower monthly payment, or eliminating mortgage insurance.
A worked example
Take a home appraised at $280,000, with $200,000 still owed on a conventional loan, refinanced into a VA cash-out loan at 90% loan-to-value.
The maximum VA-backed loan at 90% of $280,000 is $252,000. Paying off the $200,000 conventional loan leaves $52,000 in gross proceeds before costs. The funding fee at the first-use cash-out rate of 2.15% on a $252,000 loan comes to $5,418. If that fee is paid out of the proceeds rather than financed, the veteran nets $46,582 before any other closing costs. If the fee is financed into the loan instead, the loan balance rises to $257,418, pushing loan-to-value to about 91.9%, still under VA’s 100% ceiling, and the veteran keeps the full $52,000 in cash while carrying a slightly larger loan.
What causes a cash-out refinance to go badly
VA’s net tangible benefit rule exists specifically to catch a refinance that does not actually help the veteran, for example one that consolidates debt while quietly eroding home equity with little real benefit in return. A lender still has to show the new loan clears one of VA’s approved benefit tests, whether that is a lower rate, a lower payment, a shorter term, or one of the other paths, before the loan can close, which is the regulatory backstop against exactly this kind of harmful refinance.
A veteran receiving VA compensation for a service-connected disability is exempt from the funding fee on a refinance the same way they are on a purchase loan, which changes the math considerably and is worth confirming before assuming the fee applies. Skipping that confirmation is a common, avoidable mistake, since a veteran who qualifies for the waiver but does not flag it to the lender can end up paying thousands of dollars in funding fee they never owed.
Frequently asked questions
Can I use a cash-out refinance to turn my conventional mortgage into a VA loan? Yes. A cash-out refinance is the only VA loan type that can convert a non-VA loan, conventional or FHA, into a VA-backed loan. An IRRRL only works between two VA loans and cannot be used for this purpose.
Why is the cash-out refinance funding fee so much higher than an IRRRL? VA prices them as different products. A first-time cash-out refinance costs 2.15% and a later one costs 3.3%, compared to a flat 0.5% for an IRRRL. The gap reflects VA’s own risk-based pricing, not an error or a temporary rate.
How much of my home’s value can I borrow against with a VA cash-out refinance? Up to 100% of the appraised value under VA’s own guaranty rules, which is looser than the roughly 80% ceiling most conventional cash-out refinances carry. A separate 90% threshold is one of several ways to satisfy VA’s net tangible benefit test, not a hard cap.
Am I exempt from the funding fee on a cash-out refinance if I have a service-connected disability rating? Yes. Veterans receiving VA compensation for a service-connected disability are exempt from the funding fee on a refinance the same way they are on a purchase loan.
Do I need a Certificate of Eligibility for a cash-out refinance? Yes, the same Certificate of Eligibility required for any VA-backed loan. You will also need to meet your lender’s credit and income requirements and plan to occupy the home as your primary residence.
