VA Loan Refinancing: Can A Borrower Get Cash Back At Closing Time?
When you apply for a VA Interest Rate Reduction Refinance Loan, you’re getting a different type of loan product than a VA Cash-Out Refinance loan.
There is no VA-required credit check in most cases, nor is there a VA-required appraisal. In Addition to these features, the VA requires the borrower in most cases to benefit from the loan from either lower payments or lower interest rates, or both.
Since the VA does not require a credit check on an IRRRL transaction, it’s logical that VA loan rules also state there’s no cash back option available to the borrower. But the VA loan rules do stipulate there are situations where cash may be due the borrower on the transaction in the form of a refund. What do VA loan rules say about cash back to the borrower?
According to VA Pamphlet 26-7, “An IRRRL cannot be used to take equity out of the property or pay off debts, other than the VA loan being refinanced. Loan proceeds may only be applied to paying off the existing VA loan and to the costs of obtaining or closing the IRRRL. Therefore, the general rule is that the borrower cannot receive cash proceeds from the loan. If necessary, the refinancing loan amount must be rounded down to avoid payments of cash to the veteran.”
As with many things, there is an exception. VA Pamphlet 26-7 says, “The one exception is reimbursement of the veteran for the cost of energy efficiency improvements up to $6,000 completed within the 90 days immediately preceding the date of loan closing.”
At closing time, what are the circumstances where a borrower might get cash back due to a refund? “In a limited number of situations, the borrower may receive cash at closing. Some examples of situations in which VA does not object to the borrower receiving cash are:
- Computational errors,
- Changes in final pay-off figures
- Up-front fees paid for the appraisal and/or credit report that are later added into the loan
- Refund of the escrow balance on the old loan. This often occurs when a party other than the present holder originates the loan.”
The Department of Veterans Affairs does not necessarily put a limit on the amount of cash the borrower can get back in these circumstances, but it does offer the following caveat:”…if a situation involves a borrower receiving more than $500,” the lender is required to “consult VA as to its acceptability. Lenders and VA personnel should exercise common sense when assessing such situations and draw from basic program information to know the difference between an equity withdrawal and cash from unforeseen circumstances.”
Do you have questions about VA home loans? Ask us in the comments section.