Can I Get Cash Back at Closing on a VA Loan?
This is a common question that we get about VA loans. It’s an important question to have answered; how can you make a good plan for the future and your home if you don’t know how much cash you’ll still have after closing on the loan? The thing that complicates this question, however, is that the answer is different depending on what type of loan you’re getting. If you’re doing a new purchase loan, the answer is different than if you’re doing a VA streamline refinance (IRRRL), and the answer for the streamline refinance is different from the answer for a cash-out refinance. To keep things simple, we’ll cover each situation one at a time.
If you’re looking to get a VA new purchase loan, then you can only sort-of get cash back at closing. This isn’t much different from a conventional or FHA loan – generally the only way to get cash out on a mortgage is to take advantage of equity you already have in the home. If you’re just purchasing the home, whatever equity you have is being gained from the down-payment, so if you’re wanting to keep more cash in your pocket at the moment, the path is usually to just make a smaller down payment. Even on a new purchase VA loan however, you do have one option to get cash back, and that is by getting the amount you paid in earnest money back at closing. Generally the earnest money goes towards the down payment, but paying the earnest money now, then getting it back at closing could provide enough wiggle room to get out of a financial crunch right around closing on your house.
The situation is quite different when you are getting an Interest Rate Reduction Refinance Loan (IRRRL), which is the VA’s streamline refinance option. In the case of an IRRRL, there are two possibilities when it comes to getting cash back at closing. The VA allows the borrower to apply for an Energy Efficiency Mortgage (EEM), which acts as an add-on to the main loan. An EEM is a loan for energy efficient improvements to the home, and requires that the borrower specifically outline what improvements he or she would like to make to the house, get quotes or pricing for the work and supplies, and submit the information to the lender. An EEM can only be made for the combined cost of all the projects the borrower wishes to do, and cannot exceed $6,000. A lot can be done with $6,000, and keeping the amount small helps keep the underwriting process simpler and easier, especially on an IRRRL. The only other way to get cash back on an IRRRL is through mathematical or computational differences that came up in the underwriting process. The VA prohibits any amount greater than $500 being given to the borrower for this reason. Most loans go through without any of these computational errors that would cause cash to go back to the borrower.
Quite different from both situations already discussed is the cash-out refinance loan. “Cash-out refinance” is the broad term that covers every type of refinance other than the IRRRL. This category covers cash-in refinances, what would be considered debt consolidation refinances, and, of course, actual cash-out refinances themselves. Since the only difference between debt consolidation refinances and cash-out refinances is the purpose of getting money out, and getting cash out on a cash-in refinance would defeat the purpose of one, using the term “cash-out refinance” for this situation is perfectly suitable. Getting cash back on a cash-out refinance is purely a matter of convincing the lender that you want the money for a suitable purpose. The VA has no restrictions on how much money you can get or what you can do with it, but no lender will give you more cash than you have equity in your home, and they won’t give it to you unless you have a good reason. Common uses for getting cash out include making improvements to your home (EEMs are also available on a cash-out refinance), consolidating high-interest rate debt into your mortgage, and making large expenses like paying for college or purchasing a new car.