Which VA Loans Allow Cash Back to the Borrower?
There’s a common question associated with VA loans–many borrowers are interested in getting cash back at closing time from proceeds via their home loans.
But which VA loans allow this? Can a borrower, as some readers have asked, get a home loan for the appraised value of the property when the sale price is lower? Does the VA allow the applicant to take the difference out in cash?
What about refinancing VA loans? Can a borrower get cash back at closing time when refinancing?
The answers to these questions are found in VA Pamphlet 26-7, Chapters Three and Six. Chapter Three states simply, “Cash to the veteran from loan proceeds is permissible only for certain types of refinancing loans and under very limited circumstances, as follows:
• For IRRRLs, see section 1 of chapter 6.
• For cash-out refinancing loans, see section 3 of chapter 6.”
The rules in Chapter Three add,”For other types of refinancing loans and all purchase/acquisition loans, the veteran generally cannot receive cash from loan proceeds. The only exception is the refund of items for which the veteran paid cash, which were subsequently included in the loan amount.”
This is reinforced in Chapter Six, which basically says the same thing. Borrowers can’t get cash back at all in the case of a VA IRRRL/Streamline Refinance except in one specific circumstance, according to Chapter Six: “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.”
When it comes to IRRRLs/Streamline Refinancing, “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.”
For VA Cash Out Refinancing Loans, Chapter Six explains that cash back to the borrower is available once the original mortgage is paid in full and after any allowed closing costs or other expenses included are paid for. “Loan proceeds beyond the amount needed to pay off the lien(s) may be taken as cash by the borrower for any purpose acceptable to the lender. The loan must be secured by a first lien on the property.”