Can I Get Cash Back at Closing of a Purchase Loan?
There’s good news and bad news to this question. The good news is, “Yes, you can!” The bad news is that you almost definitely can’t get it for the purpose you’re thinking of. Many borrowers are hoping to get cash back to improve the home, pay off a car, help a child go to college, go back to school themselves, or tackle some outstanding credit card debt. The answer to this question will come as no surprise to anyone who has purchased a home before or understands how getting cash back on a mortgage works in general. We’ll explain it all in as much detail as possible so that you can understand how you can get cash back on a new purchase VA loan and why it is the way it is.
There are two ways to get cash back at closing on a VA purchase loan. If the loan is structured correctly, you can get your earnest money back (woot!) and that’s just about it. Sometimes confused with getting “cash back” is getting what is called an Energy Efficiency Mortgage in addition to your purchase loan. An EEM is an add-on the VA allows for VA borrowers to make improvements to their home that lower their utility bills. The maximum amount that can be gotten out on an EEM is $6,000, and the VA requires fairly detailed accounting of the changes the veteran is planning to make, and quotes from professionals on how expensive the work will be to do. You are not allowed to use funds from an EEM for anything else besides energy efficient improvements to your home. While this may have been exactly what you were hoping to hear, it’s more likely that you’re disappointed with your options.
It may be comforting to know that the VA loan program is not unique in this regard. As most current homeowners will be able to tell you, there’s nothing magical about getting cash out on your mortgage, and once you know how it works, not only will you know when you can get equity out on your mortgage, you’ll also have a pretty good idea how much cash you’d be able to get. Getting cash back on your home is done by taking advantage of the equity you have in your home. In order to get cash out on your home, you have to have equity in it.
What is equity? Equity is how much of the value of your home is yours to keep. Equity is calculated by taking the current value of your home and subtracting how much principal you still owe on it. The remainder is how much equity you have. For example, let’s say my home is worth $200,000, and I still owe $150,000 on it. I have $50,000 of equity in my home. You may need to get an appraisal done to determine the current value of your home, then go back into the records of your mortgage payments to see how much principal you’ve paid off. Remember, that a sizable chunk of your monthly payment is going towards interest, not principal. Your lender or loan holder can also probably tell you how much principal you’ve paid off so far. You will only ever be able to get as much cash out on your mortgage as you have equity in your home, because the cash out that you get is considered part of your mortgage, and is secured by your home. You will never be able to get a mortgage for more than your home is worth.
So why can’t you get cash back on your mortgage on a new purchase? Because you don’t have any equity yet. If you do have equity, it’s because you’re making a down payment on the home. It doesn’t make much sense to give money as a down payment, then try to turn around and get your down payment back as cash-out on your mortgage. A lender will almost certainly not agree to such an arrangement even if there was a reason you would want to. By offering an EEM as an add-on, the VA loan program is doing its best to offer the means for VA borrowers to lower their utility bills and raise the value of the home in one stroke.